Investors Try to Divine Pace and Magnitude of Rate Hikes

Investors will be keen to see if the market volatility following the FOMC meeting last week starts to abate this week and provides a calmer trading environment. While the January jobs report on Friday is the highlight of the week from a data perspective, the real drama will be whether the repricing in stocks and bonds adequately reflects a soon-to-be rate-hiking Fed. With that volatility as a backdrop, the market will continue to try and divine a clearer picture of the pace and magnitude of the coming rate hikes. The market has currently priced in five 25bps hikes this year, with 25% odds that the March hike will be of the 50bps variety.  Unfortunately for the market, there’s very little Fed speak this week so investors will have to cast about for their own tentative conclusions.

On the data front, with the price stability mandate moving front and center in the Fed’s reaction function, the most important metric in the upcoming jobs report is likely to be the wage gain numbers rather than job gains and/or the unemployment rate.  For January, wage gains are expected to be up 0.5% on the month versus 0.6% in December. Year-over-year gains are expected to be 5.2% versus 4.7% the prior month. Those expected wage gains will surely keep the Fed in a rate-hiking frame of mind.


Treasuries

Treasury Curve Today Week Change
3 Month 0.17% +0.01%
6 Month 0.44% +0.09%
1 Year 0.76% +0.21%
2 Year 1.20% +0.20%
3 Year 1.40% +0.13%
5 Year 1.63% +0.10%
10 Year 1.80% +0.07%
30 Year 2.11% +0.06%

Short-Term Rates

Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.32%
6 Mo LIBOR 0.53%
12 Mo SOFR 0.75%
Swap Rates  
3 Year 1.342%
5 Year 1.473%
10 Year 1.614%

 

Economic Calendar

Date Statistic For Briefing Forecast Market Expects Prior
Feb 1 ISM Manufacturing Jan 57.5 57.5 58.8
Feb 1 JOLTS Job Openings Dec 10300k 10300k 10562k
Feb 2 ADP Employment Jan 207k 180k 807k
Feb 3 Nonfarm Productivity 4Q P 3.1% 3.3% -5.2%
Feb 3 ISM Services Jan 59.0 59.5 62.3
Feb 4 Nonfarm Payrolls Jan 170k 150k 199k
Feb 4 Unemployment Rate Jan 3.9% 3.9% 3.9%
Feb 4 Avg. Hourly Earnings Jan 0.5% 0.5% 0.6%
Feb 4 Avg. Hourly Earnings (YoY) Jan 5.2% 5.2% 4.7%

 


Top 5 Events for the Week

January 31 – February 4, 2022

1.  Assessing the Post-FOMC Meeting Landscape— All Week

Investors will be keen to see if the market volatility following the FOMC meeting last week starts to abate this week and provides a calmer trading environment. While the January jobs report on Friday is the highlight of the week from a data perspective, the real drama will be whether the repricing in stocks and bonds adequately reflects a soon-to-be rate-hiking Fed.  With that volatility as a backdrop, the market will continue to try and divine a clearer picture of the pace and magnitude of the coming rate hikes. The market has currently priced in five 25bps hikes this year, with 25% odds that the March hike will be of the 50bps variety.  Unfortunately for the market, there’s very little Fed speak this week so investors will have to cast about for their own tentative conclusions.

2.  January Employment Report – Friday

With the price stability mandate moving front and center in the Fed’s reaction function, the most important metric in the upcoming jobs report is likely to be the wage gain numbers rather than job gains and/or the unemployment rate.  For January, wage gains are expected to be up 0.5% on the month versus 0.6% in December. Year-over-year wage gains are expected to be 5.2% versus 4.7% the prior month. Those expected gains will surely keep the Fed in a rate-hiking frame of mind.    The expectation for jobs is for a gain of only 150 thousand versus 199 thousand in December with the unemployment rate holding at 3.9%.  Thus, even though job gains are slowing as long as average hourly earnings continue to run at or above 4.0% the Fed’s hiking ambitions will remain.

3. January ISM Manufacturing Index – Tuesday

The ISM Manufacturing Index will be the first to give us insight into January activity with the report’s release due tomorrow. The index is expected to post 57.5 versus 58.8 in December indicating the manufacturing sector is expected to remain in solid expansionary territory which has been the case since June 2020. The latest readings, however, have started to slip slightly from the 60-level but some of that can be blamed on a lack of parts, namely chips for autos.

4. January ISM Services Index— Thursday

Markets have been waiting for a hand-off from the goods side of the economy to the services side but the recent bout of Omicron variant cases delayed a more definitive move at year-end.   The November print hit an all-time high of 69.1 while the January print is expected to be off that figure at 59.5, indicating a still-vibrant services-side but off the peak levels in November. As mentioned, the increase in December and into January of Omicron cases no doubt slowed some service-side businesses. As those cases recede, we should expect to see a rebound in the ISM Services Index for February.

Source: Bloomberg

5. Fourth Quarter Nonfarm Productivity – Thursday

Fourth quarter nonfarm productivity is expected to show a nice increase from the disappointing third quarter results. For the latest quarter, productivity is expected to have increased 3.3% versus a drop of –5.2% in the prior period. Unit labor costs are expected to have increased 1.0% versus a much higher 9.6% the prior quarter. Recall, that productivity plus population growth are the two leading ways to increase potential GDP.  The yearly productivity rate currently stands at  a disappointing –0.6%; however, that will get a nice boost if the fourth quarter print is as expected.


Yield Universe

Source: SouthState Bank Fixed Income Trading Desk

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Tags: Published: 01/28/22 by Thomas R. Fitzgerald