Morning Report: The leading inflation dove is getting more hawkish

Vital Statistics:

S&P futures4,780-3.2
Oil (WTI)77.690.71
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.42%

Stocks are flattish this morning as we await the FOMC minutes this afternoon. Bonds and MBS are up small.

Mortgage applications fell 2.7% over the holiday week as purchases fell 4% and refis fell 2%. “Mortgage rates continued to creep higher over the past two weeks, as markets maintained an optimistic view of the economy,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance demand continues to dwindle, as many borrowers refinanced in 2020, and in early 2021 – when mortgage rates were around 40 basis points lower. The purchase market also finished the year on a slower note, with the final week coming in at the weakest since October 2021. Even though average loan sizes were lower, home price appreciation remains at very high levels.”

The ADP Employment report showed that 807,000 jobs were added in December. “December’s job market strengthened as the fallout from the Delta variant faded and Omicron’s impact had yet to be seen,” said Nela Richardson, chief economist, ADP. “Job gains were broad-based, as goods producers added the strongest reading of the year, while service providers dominated growth. December’s job growth brought the fourth quarter average to 625,000, surpassing the 514,000 average for the year. While job gains eclipsed 6 million in 2021, private sector payrolls are still nearly 4 million jobs short of pre-COVID-19 levels.” Note that the expectation for Friday’s jobs report is 400k, so there may be some upside there.

One of the leading dovish voices at the Fed, Neel Kashkari backs two rate hikes in 2022. He discusses the two “opposing forces” that the Fed needs to balance going forward – the first, that inflationary expectations become built into the economy, and the second, that the economy returns to the slow-growth / low inflation state that has described the past 20 years.

He has a point in that the economy is basically being force-fed adrenaline with trillions worth of fiscal stimulus, and highly negative inflation-adjusted interest rates. Growth, at least according to the GDP numbers is ok, however it should be rip-roaring given this unprecedented amount of stimulus. Economists are well aware that stimulus has diminishing returns – they call it pushing on a string – and we may well be at this point. Which means that when the sugar high dissipates the economy returns to mediocre growth, albeit with higher inflation.

As of now, the market consensus is that we will see a total of 75 basis points in rate hikes next year:


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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