The Market Today

Treasury Yields Shoot Higher as Fed Plays Catch-Up


by Craig Dismuke, Dudley Carter

2022 ECONOMIC OUTLOOK

Vining Sparks 2022 Economic Outlook Webinar: We will host our 2022 Economic Outlook webinar Tuesday morning at 10 a.m. CT.  To register, please click here.  During the presentation, we will look at the current state of the economy and dig into the imbalances which are threatening the long-term stability of the expansion. The ability of the global supply chain to heal and labor supply to return will determine if the Fed is able to exit their policies gradually enough to not cut off the expansion.


TODAY’S CALENDAR

The calendar kicks off on a calm note today with only the November final wholesale inventories report due at 9:00 a.m. CT.  Investors are clearly focused this week on December’s CPI data scheduled for Wednesday.


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OTHER ECONOMIC NEWS

ICYMI – January 7, 2022 Weekly Market Recap: Treasury yields rocketed higher in the first week of 2022 as early momentum gathered steam after the release of the Fed’s December minutes and the BLS’s nonfarm payroll report. Yields jumped Monday following a couple of quiet weeks around the Christmas and New Year’s holidays, without an obvious catalyst, and continued higher into Wednesday morning. The updraft gathered steam that afternoon after the Fed’s December minutes showed broad agreement for beginning to shrink the balance sheet closer to liftoff and at a quicker pace than in the previous cycle. The hawkish tone rattled equities, sending the S&P 500 sliding 1.9% in one of its worst performances over the last year. While yields consolidated for the most part Thursday, the curve set new cycle highs again on Friday after the December payroll report indicated the labor market is tightening more quickly than expected. Seasonally adjusted hiring of 199k came up well short of the 450k gain expected. However, the unemployment rate fell sharply from 4.2% to 3.9% as participation remained stagnant, leading to another firmer-than-expected month for wage growth and adding to speculation the Fed will be more aggressive in tightening policy. The 2-year Treasury yield added 13.4 bps last week to 0.87%, the largest weekly increase since October 2019 and the highest level since March 2020. The 5-year and 10-year yields jumped more than 20 bps in their biggest weekly lunges since September 2019, closing at their highest levels since early 2020. Click here to view the full recap.


TRADING ACTVITY

Stocks Remain Weak As Treasury Yields Add Modestly to Last Week’s Surge: Global equities continue to trade with a soft tone Monday as Treasury yields held at cycle-high levels after rocketing higher last week to ring in the new year (more above). Chair Powell’s confirmation hearing tomorrow and December’s CPI Inflation report on Wednesday will be attention grabbers against a backdrop of the hawkish Fed minutes and tight labor market data that startled markets last week. Stocks were relatively calm across Asia but European indices and U.S. futures were at session lows at 7 a.m. CT as early losses have steadily intensified. Continued weakness for tech shares dragged the Nasdaq down around 1.2% and the S&P 500 by around half of that amount. A decline Monday would mark the fifth consecutive drop for both indices since Treasury yields began their rapid ascent to start 2022. The Treasury curve had added modestly to those recent gains at 7:30 a.m. and was trading at new cycle-high levels. Pulling back from higher opening levels, the 2-year yield rose 1.0 bps to 0.87% as the 5-year yield added 2.0 bps to 1.52%. The 10-year yield was higher by 1.3 bps at 1.77% after breaking above 1.80% early in European trading.


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