Morning Report: No changes at the Fed

Vital Statistics:

 

  Last Change
S&P futures 3771 23.3
Oil (WTI) 53.32 0.44
10 year government bond yield   1.04%
30 year fixed rate mortgage   2.83%

Stocks are higher this morning on no real news. Bonds and MBS are down.

 

The Fed made no changes to monetary policy in its January meeting. The Fed will continue to increase the size of its balance sheet until “substantial further progress” has been made towards the Fed’s price and employment goals. They included the language that inflation must exceed 2% and be on track to exceed that number for some time. This is a signal to the markets that the Fed is not going to pre-emptively raise rates once we start getting inflationary signals.

The other thing to keep in mind is that the Fed has apparently learned from the 2013 “taper tantrum” and will not move as fast as they did back then. I suspect the Fed will gradually reduce the amount of MBS and Treasuries they buy, from, say $80 billion a month to $60 billion, and work their way down. Then they will re-invest maturing principal back into the MBS market. The punch line is that the economy has suffered a tremendous shock, and the Fed is going to go slow. This means rates are goin nowhere for a while. I think fears of a big increase in rates in the back half of 2021 are probably overblown. While there is definitely some inflation out there (food and housing) the Fed is going to ignore it until the unemployment rate is around 4%.

 

Fourth quarter GDP came in at 4%, a touch below expectations. Personal Consumption Expenditures rose 2.5%, again below expectations. You can see just how dramatically COVID-19 hit the economy by comparing the size of the Q2 and Q3 spikes compared to historical growth rates. For the fully year 2020, GDP decreased 3.5%.

 

Initial Jobless Claims fell to 847k last week. We were sitting around 200k per week pre-COVID, so we still have a lot of wood to chop to get back to normalcy.

 

New Home Sales rose to a seasonally adjusted annual rate of 842,000 in December, according to Census. This is up 1.6% from November, and 15% above December 2019 numbers. The median sales price rose 8% to $356K.

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