Vital Statistics:
| Last | Change | |
| S&P futures | 4,407 | -14.2 |
| Oil (WTI) | 87.12 | 0.33 |
| 10 year government bond yield | 1.81% | |
| 30 year fixed rate mortgage | 3.78% |
Stocks are lower this morning as earnings continue to come in. Bonds and MBS are down small.
The upcoming week will be dominated by the jobs report on Friday. The consensus is that January’s numbers will look a lot like December, with payroll growth of only 200k. The unemployment rate is expected to remain at 3.9%, however average hourly earnings are forecasted to increase at a 5.2% clip.
Aside from the jobs report, we will also the ISM data, construction spending, and productivity numbers. We don’t have much in the way of Fed-speak.
The construction spending report will be interesting given that lumber prices are back on the march, and skilled labor is still scarce.
Goldman is now forecasting 5 rate hikes this year, based on Friday’s employment cost index. The March Fed Funds futures are fully onboard with a rate hike, and markets are pricing in a 20% chance of a 50 basis point hike.
Look at the table below to get an idea of just how much the consensus has changed. At the end of the year, the market considered the March meeting to be a toss-up between no change and a 25 basis point hike. There has been a sea-change in opinion.
While the economic information that is transmitted by interest rates is highly distorted, it is interesting to watch the behavior of the yield curve, which is the difference between longer-term rates and shorter-term rates. As of right now, the 10-year is trading at 1.8%, while short term rates are zero. The consensus for the December meeting is a Fed Funds rate between 125 and 150 basis points.
This is a signal that the yield curve is going to flatten this year pretty dramatically. The steepness of the yield curve generally provides a signal about what the market is thinking regarding growth. When the economy is accelerating, investors generally rotate out of long-term government bonds and invest into riskier assets.
What we are seeing is a flattening yield curve, which is generally a signal for weaker economic growth. At the end of the year, the consensus for the Fed funds rate was 75 basis points and the 10 year was 1.63%. Now the consensus is for a 125 basis point Fed Funds rate and a 1.8% 10-year.
A flattening yield curve is a big signal that the market believes the current level of inflation is temporary and will return to its historical 2% level. It is also a signal that economic growth is going to decelerate as well.
I would caution that global central banks are managing interest rates pretty tightly, and much of the demand for Treasuries is artificial. The signal-to-noise ratio of the yield curve is not what it used to be, but it is something to watch.
The Daily Tearsheet 