Treasuries on the Defensive to End the Week
As we try to turn attention away from our GameStop positions and focus on the more sedate trading found in fixed income markets, we are met today with personal income and spending numbers for December. While the fourth quarter GDP release from yesterday incorporated the income and spending numbers, the December report gives us a chance to assess the momentum of the consumer heading into 2021. Personal income rose 0.6% for the month easily eclipsing the 0.1% expectation but doesn’t offset a loss of –1.3% in November. Meanwhile, personal spending fell –0.2%, beating the –0.4% expectation but it is the second straight month of declining spending with November adjusted down from –0.4% to –0.7%. The Fed’s favored inflation gauge, Core PCE YoY, was 1.5% versus 1.4% in November. All-in-all a fairly weak showing by the consumer and that was reflected in GDP (more on that below). The question is does the consumer get back to spending in January, or will it be a longer pause than a two-month blip?
The FOMC meeting and press conference went pretty much as expected, but there were some key nuggets of new information. In the press conference Fed Chair Powell made it crystal clear they will want to see the labor market move back to full employment and inflation move not only to 2% but modestly over it in order to offset the years of sub-2% rates. We had been searching for a definition of “substantial improvement” in the economy as it relates to guiding future Fed policy and Powell gave us that with the maximum employment and inflation rate guidance. They had tied those criteria to policy in the past several months but not to the “substantial improvement” term. If we think of the pre-pandemic unemployment rate of 3.5% as a guide for full employment, we are probably a two to three years away with unemployment currently at 6.7% and job growth having slowed in recent months.
Also, as we expected, Powell batted away any discussion of tapering quantitative easing purchases. Those monthly purchases currently are at a minimum $80 billion in Treasuries and $40 billion in mortgage backed securities. He reiterated the “substantial improvement” phrase as the guide for when to expect some discussion of tapering to begin. So, again if we look at full employment and inflation at 2% and trending modestly over that, QE purchases should continue for the foreseeable future. No mention was made about extending durations of purchases but it seems if yields were increasing to the point that it would slow the economic recovery, you can expect longer duration purchases to be made.
The meeting statement and press conference were a confirmation that Powell and company will err on the side of getting the economy back to pre-pandemic levels before starting to ease off the current accommodative stance. As to inflation, he reiterated we were in a disinflationary environment pre-pandemic and that will likely continue once the pandemic is behind us. He is not concerned that with fiscal stimulus (and more likely to come), an improving economy, particularly in the second half, and accommodative monetary policy that inflation will move uncomfortably high. All of this points to a Fed that will be going full bore with the ultra-accommodative posture for this year and probably well into 2022, if not beyond. Longer-term Treasuries confronted this outlook weeks ago with an upward yield bias, albeit modest at this point.
Fourth Quarter GDP Comes In a Tad Lighter Than Expected
The first look at fourth quarter GDP came in yesterday at 4.0% QoQ (annualized) which was just under the 4.2% estimate but decent nonetheless. The slight miss was driven by personal consumption at 2.5% versus the 3.1% expectation. The quarter, however, was a return to more normal levels of GDP activity as the third quarter posted a record-breaking 33.4% QoQ (annualized) gain which followed a record-breaking loss of –31.4% in the second quarter. While a 4% gain for the quarter looks decent on its face, GDP was still down –2.5% from the same quarter a year ago. Also, for the full year, GDP was down –3.5%, the first negative year since 2009, so there remains much to be done to get the economy back to it’s pre-pandemic levels. In addition, inflation was more subdued than expected with core PCE at 1.2% QoQ (annualized) vs. the 1.4% forecast.
As mentioned, the slight miss in growth came primarily as a result of the consumer moderating their spending and that was a consequence of the spreading virus cases that occurred throughout the fourth quarter. Services tied to customer contact were particularly hit as lockdowns and renewed restrictions curtailed business activity, particularly in the hospitality and travel sectors. Those sectors lost nearly 500,000 jobs in December alone. Meanwhile, housing activity continued to shine through the quarter and all that home buying filtered into construction and durable goods numbers that buoyed the quarter as the consumer paused a bit in their services/non-durable spending. Inventory rebuild was also shy of expectations limiting GDP growth but that sets the stage for a rebound in the current quarter.
Speaking of the current quarter, expectations are for GDP to be a touch soft at 2.3% QoQ (annualized) as virus cases slowly recede but not fast enough to entice the consumer as consumption is expected at a desultory 2.0% pace. Second quarter expectations jump a bit to 4.0% for GDP where they are expected to run for the balance of the year as vaccinations spread and activity starts to look a little more normal, but still not all the way back.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.06%||-0.01%||1 Mo LIBOR||0.12%||-0.01%||FF Target Rate||0.00%-0.25%||3 Year||0.265%|
|6 Month||0.07%||-0.01%||3 Mo LIBOR||0.21%||-0.01%||Prime Rate||3.25%||5 Year||0.529%|
|2 Year||0.12%||Unch||6 Mo LIBOR||0.23%||-0.01%||IOER||0.10%||10 Year||1.11%|
|10 Year||1.07%||-0.03%||12 Mo LIBOR||0.31%||-0.02%||SOFR||0.03%|
Securities offered through the SouthState Bank Correspondent Division ("SouthState") 1) are not FDIC insured, 2) not guaranteed by any bank, and 3) may lose value including a possible loss of principal invested. SouthState does not provide legal or tax advice. Recipients should consult with their own legal or tax professionals prior to making any decision with a legal or tax consequence. The information contained in the summary was obtained from various sources that SouthState believes to be reliable, but we do not guarantee its accuracy or completeness. The information contained in the summary speaks only to the dates shown and is subject to change with notice. This summary is for informational purposes only and is not intended to provide a recommendation with respect to any security. In addition, this summary does not take into account the financial position or investment objectives of any specific investor. This is not an offer to sell or buy any securities product, nor should it be construed as investment advice or investment recommendations.