Busy Week Headlined by the Fed

For a Fed meeting that isn’t going to produce a rate hike, or any updates to rate and economic forecasts, it’s sure shaping up to be quite the pivotal meeting anyway. The market goes into Wednesday’s meeting with a consensus expectation that the Fed will signal quarterly 25bps rate hikes beginning in March. They are also likely to signal a terminal rate of  1.75%, and balance sheet runoff beginning sometime in mid-year. If all that comes to pass via the statement and/or  post-meeting press conference, you can expect Treasuries to likely rally on “getting it right.” However, if some of the parameters are different, say an initial 50bps hike is signaled, and/or outright selling from the portfolio is proposed, expect continued upward pressure on yields.

Away from the Fed, the December Personal Income and Spending Report is due Friday. Recall the weak retail sales numbers a couple weeks ago, and the personal spending in this week’s report is likely to reveal the same Omicron-inspired weakness. Inflation, meanwhile, is expected to continue higher with core PCE expected to be up 0.5% for the month and 4.8% year-over-year. This would be a new cycle high.

Our first look at fourth quarter GDP is due Thursday with quarter-over-quarter annualized growth expected to be 5.3% versus 2.3% in the prior quarter.


Treasuries

Treasury Curve Today Week Change
3 Month 0.16% +0.04%
6 Month 0.35% +0.04%
1 Year 0.55% +0.05%
2 Year 1.00% -0.01%
3 Year 1.27% -0.05%
5 Year 1.53% -0.07%
10 Year 1.73% -0.08%
30 Year 2.05% -0.05%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.26%
6 Mo LIBOR 0.44%
12 Mo SOFR 0.60%
Swap Rates  
3 Year 1.201%
5 Year 1.372%
10 Year 1.523%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Jan 25 S&P CoreLogic CS 20-City Home Appreciation Nov 18.20% 17.90% 18.41%
Jan 25 Consumer Confidence Jan 111.5 112.0 115.8
Jan 26 New Home Sales Dec 765k 760k 744k
Jan 26 FOMC Rate Decision Jan 0.00%-0.25% 0.00%-0.25% 0.00%-0.25%
Jan 27 GDP (QoQ) Annualized 4Q A 5.3% 5.3% 2.3%
Jan 27 Personal Consumption 4Q A 2.7% 3.2% 2.0%
Jan 28 Personal Income Dec 0.5% 0.5% 0.4%
Jan 28 Personal Spending Dec -0.6% -0.6% 0.6%
Jan 28 Core PCE (YoY) Dec 4.8% 4.8% 4.7%

 


Top 5 Events for the Week

January 24 – 28, 2022

1.  FOMC Meeting — Wednesday

For a Fed meeting that isn’t going to produce a rate hike, or any updates to rate and economic forecasts, it’s sure shaping up to be quite the pivotal meeting anyway. The market goes into Wednesday’s meeting with a consensus expectation that the Fed will signal quarterly 25bps rate hikes beginning in March. They are also likely to signal a terminal rate of  1.75%, and balance sheet runoff beginning sometime in mid-year. If all that comes to pass via the statement and/or  post-meeting press conference, you can expect Treasuries to likely rally on “getting it right.” However, if some of the parameters are different, say an initial 50bps hike is signaled, and/or outright selling from the portfolio is proposed, expect continued upward pressure on yields. There’s plenty to be uncertain about until Wednesday, so expect nervous trading to last until then.

2.  December Personal Income and Spending – Friday

After the much weaker-than-expected Retail Sales report two weeks ago, the personal income and spending numbers take on added significance. For December, personal income is expected to have increased 0.5% versus 0.4% in November.  Personal spending, meanwhile, is expected to have decreased -0.6% versus a solid 0.6% gain in November.  These numbers are inflation-adjusted, unlike the retail sales figures, so it does look like there was weakness in spending for December. Keep in mind, however, that expected weakness is after two strong months of spending. Certainly, some Omicron variant is at play in these numbers, and case counts continued to grow into the new year, so the spending weakness may appear again in January.

The all-important inflation number in the report that the Fed prefers (Core PCE) is expected to have increased 0.5% MoM, matching the November gain, and 4.8% YoY (this would be a new cycle high and the highest in more than 30 years) versus 4.7% in November.

Source: Bloomberg

3. Fourth Quarter GDP – Thursday

The first estimate of fourth quarter GDP is due on Thursday. Expectations are  for GDP to have grown 5.3% quarter-over-quarter annualized. This compares to 2.3% in the third quarter. Powering the pickup in the fourth quarter was consumer consumption which is expected to have increased by 3.2% versus 2.0% in the third quarter. The personal income and spending numbers are a part of this report and as we mentioned above, spending is expected to have weakened in December due to Omicron cases increasing at year-end. Thankfully, the quarter began with strong consumption in October and a solid result in November. With case counts continuing to increase in January, along with the market turmoil, it will be interesting to see if the December spending weakness carries over into January. Presently, first quarter GDP is expected to have grown by 2.9%.

4. January Consumer Confidence— Tuesday

With two-thirds of the economy consumption-based, it’s always important to look at the confidence of the consumer for tells on future spending and hence GDP.  With both the University of Michigan Sentiment reading and the Conference Board’s measure struggling of late, the somewhat sour outlook has just started to show up in weaker retail sales in December. That weakness could be mostly Omicron cases increasing during the month, but consumer confidence has been weakening for awhile.   The Conference Board’s confidence reading is expected to slip a bit to 112.0 versus 115.8 in December.  Consumer confidence this year peaked in June at 128.9, just as inflation was starting to become the lead story, and confidence readings have been struggling ever since.

5. December Durable Goods Orders – Thursday

Consumer consumption has focused more on hard goods over services, and durable goods orders have followed suit in posting solid activity during much of the pandemic. The thought back in the summer was that, with more reopening of the services-side of the economy, there would be a hand-off from the manufacturing side and carry the economy in 2022. That hand-off was delayed by the arrival of the delta variant, and may be delayed again as the omicron variant washes over the country. December orders are expected  to decrease –0.5% versus a 2.6% gain in November. Orders, less the volatile transportation sector, are expected to increase 0.4% versus 0.9% in November. Thus, expectations are that the durable goods side of the economy, net of transportation, will post another solid result for December, with just a little softening expected versus November.


Yield Universe

Source: SouthState Bank Fixed Income Trading Desk

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Tags: Published: 01/21/22 by Thomas R. Fitzgerald