The Market Today

Yields Climb after Biden Chooses Powell for a Second Term as Fed Chair

by Craig Dismuke, Dudley Carter


Markit PMIs and Richmond Fed Manufacturing: The two economic releases slated for Tuesday will be released after markets open. Markit will publish preliminary November results for its manufacturing and services PMIs at 8:45 a.m. CT. The latest data are expected to show that activity across both sectors of the economy picked up from October’s pace but remained below stronger summer levels from prior to the Delta wave. Europe’s PMIs were released overnight and showed an unexpected increase in the headline measure. However, Markit cautioned in the statement that, “With supply delays remaining close to record highs and energy prices spiking higher, upward pressure on prices has meanwhile intensified far above anything previously witnessed by the surveys. … Given the mix of supply delays, soaring costs and renewed COVID-19 worries, business optimism has sunk to the lowest since January, adding to near-term downside risks for the eurozone economy.”

At 9:00 a.m., the Richmond Fed Bank will refresh its manufacturing activity index for November and is expected to show a modest decline. Reports last week showed stronger-than-expected activity in the New York and Philadelphia Fed Districts but weakness in the Kansas City Fed’s footprint.



Biden Picks Powell for Second Term as Fed Chair: About the time Monday’s Market Today landed in your inbox, the White House announced that President Biden had decided to give Chair Jerome Powell another four-year term at the helm of the U.S. Federal Reserve and had selected current Fed Governor Lael Brainard to replace Richard Clarida as Fed Vice Chair when his term lapses in January. Both appointments require Senate confirmation. The incumbent Powell was considered the early-on favorite to be Chair, although speculation had risen in recent weeks that the decision between he and Brainard, seen as a moderately more dovish policy pick, might be much closer than anticipated, leading to some uncertainty for markets (more below). Governor Brainard’s appointment as second in command means she will not oversee bank supervision, widely considered the consensus outcome if Powell remained Chair. The decision gives President Biden three vacancies on the Federal Reserve Board of Governors to fill: an existing vacancy, the Fed Vice Chair for Supervision (Governor Quarles previously announced he was resigning from the Fed Board at the end of December), and Governor Brainard’s current seat. The White House statement indicated the President will begin announcing appointments for those open positions early next month.

Existing Home Sales Inched Up Unexpectedly in October to Best Pace Since January: The modest 0.8% improvement in purchases of previously owned homes last month pushed the annualized sales pace to 6.34 million annualized units. While below better levels from late last year, activity topped expectations for a 6.2-million pace and remains well above the pre-pandemic trend. A small 0.4% increase in sales in the South, the largest volume region, joined with a larger 4.2% gain in the Midwest to offset a 2.6% decline in the Northeast. Sales in the West were essentially unchanged. Months of supply was flat at 2.4 while the median price edged up from $351.2k to $353.9k. The median price has risen 13.7% from a year ago on average over the last three months, brisk compared with pre-pandemic norms but a downshift from a rate above 20% over the summer.


Rates Rose as Markets Unwound Pricing for Brainard-Led Fed: Treasury yields were higher ahead of U.S. trading on Monday but took another step up after the White House announced that President Biden would nominate current Fed Chair Powell for a second term (more above). Treasury yields dipped on November 8 on a report that Fed Governor Brainard, considered the more dovish option, had interviewed with the President for the Chair position. As a result, market pricing adjusted to assign more even odds to the race between Powell and Brainard, providing a downward lean, on balance, for Treasury yields. As the pricing for a potentially more dovish Brainard selection was unwound Monday, Treasury yields jumped sharply, led by the belly of the curve. The 7-year yield jumped 9.8 bps to 1.55%. The 5-year yield rose 9.5 bps to 1.32%, its highest close since February 21, 2020; an auction of 5-year notes tailed, fueling further yield gains. The 2-year yield rose 7.8 bps to 0.58%, its highest close since March 5, 2020, as fed funds futures repriced for a higher rate path. The 10-year yield added 8.4 bps to 1.62%, still below its pandemic peak above 1.70% from a month ago. Higher rates hurt growth stocks and the Nasdaq, which declined 1.3% on the day. After hitting a new all-time high, the S&P 500 succumbed to late-session selling to close down 0.3%. S&P 500 Financials closed in second place, helped by those higher rates, while energy companies led all gains. Overshadowed by the moves in other markets, oil and gasoline prices jumped despite reports the U.S. and other countries were contemplating a coordinated release from national crude reserves to combat higher prices. Always the swing factor, OPEC responded, indicating the actions could impact its plans to gradually increase production.

Yields Add to Climb as Global Sell-Off Continues Overnight: The White House confirmed in a statement early Tuesday that the Biden administration would release 50 million barrels of crude from the U.S.‘s Strategic Petroleum Reserve as part of a coordinated response with several other countries to “maintain adequate supply as we exit the pandemic.” Oil prices remained lower on the day but jumped to session highs after the announcement. Treasury yields continued to creep higher and the curve steeper amid a broad global sell-off overnight. The 2-year yield was up 0.6 bps shortly after 7 a.m. to 0.64% as the 5-year yield added 3.2 bps to 1.36%, both setting new highs for the cycle. The 10-year yield was 3.6 bps higher at 1.66%. Higher rates remain a drag on equity markets as tech shares led declines for many major global exchanges. The Stoxx Europe 600 was down 0.8% despite an unexpected recovery in November PMIs as new restrictions amid the virus surge likely means the merriment will be short-lived. U.S. equity futures were essentially flat.

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Europe’s Situation Remains Shaky: While U.S. markets were squarely focused on developments surrounding the leadership of the Federal Reserve, most eyes in Europe remained watchful of developments related to the latest virus outbreak across the continent. The nationwide lockdown Austria’s government announced last Friday took effect on Monday. Some states in Germany have also reintroduced some restrictions and Chancellor Merkel repeated Monday that the country is in a “highly dramatic” situation. Germany’s Health Minister ominously surmised, “Just about everyone in Germany will probably be either vaccinated, recovered or dead” by winter’s end.

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