Morning Report: The leading inflation dove becomes 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:

20 Responses

  1. This should turn out well:

    “On the left, immigration activists are accusing Biden of failing to live up to his promise to repair the damage inflicted by Trump. On the right, critics are seizing on a report that the administration was in talks to pay people up to $450,000 each, saying that amounts to coddling people who sought to cross the border illegally.

    A year after taking office, Biden’s efforts to unwind the Trump immigration policies he sharply condemned have been messy, sporadic and politically fraught. After moving quickly to curb some of his predecessor’s most controversial approaches, Biden has, in some key ways, adopted a more restrictive posture toward migrants in recent months.”

    Also, it’s interesting that this is allowed in a court filing:

    “The plaintiffs, who use pseudonyms in their legal filings to protect their privacy, are seeking financial compensation after enduring what was widely regarded as one of President Donald Trump’s harshest policies.”

    Edit: I suppose the use of pseudonyms here isn’t any different than how Roe v Wade was filed.


    • I think it is in the AP style guide that any legitimate criticism of democrats is framed as “critics seize”

      isn’t the pseudonym issue just more evidence that the legal system is run by and for the left? they just make up the rules as they go in order to protect the Party.


      • I read up on it. It’s part of the Federal Rules for Civil Procedure. There’s a whole multipart test to determine if it’s legit.

        The short version is:

        “If there is a threat of actual harm or retaliation, courts will generally permit a party to proceed with filing a lawsuit under a pseudonym.”

        In this case, I believe the justification was that the potential settlements would make the plaintiffs subject to potential kidnapping.

        Of course, you have to look all this information up on your own, But the Post’s version that it’s about protecting privacy is an oversimplification.


  2. “and highly negative inflation-adjusted interest rates.”

    One big difference between now and previous bouts of inflation is how low savings account & CD interest rates still are. It’s absurd.


    • that will change once banks have competition from money market funds. The difference in rates isn’t big enough to offset the benefit of the FDIC guarantee. Once money market rates hit 3%, i suspect the flight will happen.

      Hopefully this time around, we won’t see another disintermediation problem like we did in the 70s,


      • Brent, what does this mean?

        Hopefully this time around, we won’t see another disintermediation problem like we did in the 70s,


        • Banks borrow short to lend long. This means that they borrow money at short term rates and lend at long term rates. So the interest income they earn is locked in, but their cost of funds can be unstable. This became a big problem in the high-inflation 1970s.

          During the 1970s, people pulled their money out of the banks in order to take advantage of products like money market accounts which provided higher interest rates than banks could provide.

          Smaller, local banks generally focused on mortgages and car loans. In the 1960s, rates were exceptionally low, and many people were paying 3% on their mortgage. The banks needed to pay 5%+ to attract deposits, so they were borrowing money at 5% to make 3%. Not a good business model.

          Derivatives make this somewhat less of a problem today, however commercial real estate loans tend to be in the mid single digits and last 10 years. So if rates move up dramatically, they could have the same issues again.


        • Ah, ok, thank you.

          Obviously racist.


        • goes without saying


        • It’s assumed because it’s part of capitalism.

          Also, my read of the current spread is Money Markets are about .50 – .60% and regular bank savings accounts at most major banks are at around .01 – .02%.

          Credit Unions are higher I think, around .10%.

          Does this match what you see?


        • according to the WSJ money market page, money markets are paying around 7 basis points and the 5 year CD is paying 42.


  3. They are doubling down:

    “Manhattan DA to stop seeking prison sentences in slew of criminal cases
    By Larry Celona,Tamar Lapin,Tina Moore,Reuven Fenton and Bruce Golding
    January 4, 2022 11:32am”


Be kind, show respect, and all will be right with the world.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: