FOMC Decisions Continue to Ripple Through Markets

The market will get to spend its pre-holiday week digesting what was learned from the latest FOMC meeting. That meeting represented a clear shift in the reaction function of the Fed to one of inflation-fighting, first and foremost. With an acceleration of tapering expected to be completed now in March, the Fed has penciled in three rate hikes for the balance of 2022. Interestingly, since the meeting, longer-dated Treasuries have rallied, and even the belly of the curve has followed suit, despite the faster rate-hiking projections.

The signal seems to be that the market takes the Fed’s inflation-fighting tone to heart, but investors also know the Fed rarely engineers a successful soft-landing of the economy in the face of a rate-hiking campaign. Longer-dated Treasury investors seem to believe the Fed will eventually beat back inflation, but with some cost to economic growth. And that feeling is trickling further down the yield curve. Will that perception change this week? There are no Fed speakers planned until after the new year, so the market will have to work this out on their own.

Away from Fed tea-leaf reading, the November Personal Income and Spending Report will get some attention on Thursday. The Fed’s favorite inflation indicator, core PCE, is expected to hit a new cycle high of 4.5% YoY, the highest in more than 30 years. That’s certainly an indicator the Fed was looking at when they struck their inflation pivot.


Treasuries

Treasury Curve Today Week Change
3 Month 0.03% -0.02%
6 Month 0.12% Unchanged
1 Year 0.23% -0.02%
2 Year 0.61% -0.06%
3 Year 0.89% -0.10%
5 Year 1.15% -0.10%
10 Year 1.39% -0.08%
30 Year 1.81% -0.04%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.21%
6 Mo LIBOR 0.31%
12 Mo LIBOR 0.53%
Swap Rates  
3 Year 1.079%
5 Year 1.244%
10 Year 1.443%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Dec 22 Consumer Confidence Dec 110.3 111.0 109.5
Dec 22 Existing Home Sales Nov 6.55m 6.53m 6.34m
Dec 22 Exiting Home Sales (MoM) Nov 3.3% 3.0% 0.8%
Dec 23 Personal Income Nov 0.5% 0.4% 0.5%
Dec 23 Personal Spending Nov 0.5% 0.6% 1.3%
Dec 23 Core PCE (MoM) Nov 0.4% 0.4% 0.4%
Dec 23 Core PCE (YoY) Nov 4.5% 4.5% 4.1%
Dec 23 Durable Goods Orders (MoM) Nov 1.8% 1.7% -0.4%
Dec 23 Durable Ex Transportation (MoM) Nov 0.6% 0.6% 0.5%

 


Top 5 Events for the Week

December 20 – 24, 2021

1.  Aftermath of FOMC Meeting— All Week

The market will get to spend its pre-holiday week digesting what was learned from the latest FOMC meeting. That meeting represented a clear shift in the reaction function of the Fed to one of inflation-fighting first and foremost. With an acceleration of tapering expected to be completed now in March, the Fed has penciled in three rate hikes for the balance of 2022. Comments from Fed Chair Powell made it clear the Fed sees beating back the embers of inflation to also be critical to getting to full employment.

Interestingly, since the meeting, longer-end Treasuries have rallied, and even the belly of the curve has followed suit, despite the faster rate-hiking projections. The market seems to be signaling that they take the Fed’s inflation-fighting tone to heart, but investors also know the Fed has rarely been successful in engineering a soft-landing of the economy in the face of a rate-hiking campaign. Essentially, longer-end investors think the Fed will eventually beat back inflation but with some cost to economic growth. Will that perception change this week? There are no Fed speakers planned until after the new year to offer guidance, so the market will have to work this out on their own for now.

2.  November Personal Income and Spending – Thursday

After the weaker-than-expected Retail Sales report last week, the personal income and spending numbers take on added significance. For November, personal income is expected to tick a tenth lower from October’s result with a gain of 0.4% for the month.  Personal spending, meanwhile, is expected to have increased 0.6% versus a solid 1.3% gain in October.  These numbers are inflation-adjusted, unlike the retail sales figures, so it does look like there was real growth in spending and not just increases reflective of price hikes. The all-important inflation number in the report that the Fed prefers (Core PCE) is expected to increase 0.4% MoM, matching the October gain, and 4.5% YoY (a new cycle high and the highest in more than 30 years) versus 4.1% in October.

Source: Bloomberg

3. November Existing Home Sales – Wednesday

Existing home sales—accounting for 90% of the residential market— are expected to be up slightly from October’s solid results. The November print is expected to  see sales increase 3.0% month-over-month to 6.53 million houses from 6.34 million in October, on an annualized basis.   If the expectation is achieved  sales will be approaching the high water mark of 6.73 million set a year ago. It looks like scarce inventory, rapid price appreciation, and recent increases in mortgage rates are being handled as sales are set for a third straight month-over-month increase. For the last 15 months, sales have ranged between 6.00 million annualized and 6.73 million, but prior to the pandemic sales routinely averaged 5.50 million annualized, so clear evidence the housing market remains one hot sector despite the pandemic.

4. December Consumer Confidence—Wednesday

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 hasn’t dented consumers willingness to spend, and that’s the important point. That fact takes a little luster off the importance of these confidence readings right now.  The Conference Board’s confidence reading for December is expected to tick up to 111.0 versus 109.5 in November.  Consumer confidence this year peaked in June at 128.9, just before inflation started becoming a main stream story, and confidence readings have been struggling ever since.

5. November 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 the economy reopening more and more the services-side of the economy would take a hand-off from the manufacturing side and carry the economy in 2022. That hand-off was delayed somewhat by the arrival of the delta variant, and may be delayed again as the omicron variant washes over the country. November orders are expected  to increase 1.7% versus –0.4% in October. Orders less the volatile transportation sector are expected to increase 0.6% versus 0.5% in October. Thus, expectations are that the durable goods side of the economy will post another solid result for November, with little sign of softening or handing off to the services-side.


Yield Universe

Source: SouthState Bank Fixed Income Trading Desk

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Published: 12/20/21 Author: Thomas R. Fitzgerald