All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,693	1.2
Oil (WTI)	80.09	2.11
10 year government bond yield		1.73%
30 year fixed rate mortgage		3.47%

Stocks are flattish this morning as global bond yields rise. Bonds and MBS are down.

The FOMC minutes were taken as bearish for bonds, and yields started creeping up after the release. It isn’t just the US – German, British and Japanese yields are up big as well. Here is the discussion of inflation:

Participants remarked that inflation readings had been higher and were more persistent and widespread than previously anticipated. Some participants noted that trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb. While participants generally continued to anticipate that inflation would decline significantly over the course of 2022 as supply constraints eased, almost all stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well. In discussing their revisions to the inflation outlook, participants pointed to rising housing costs and rents, more widespread wage growth driven by labor shortages, and more prolonged global supply-side frictions, which could be exacerbated by the emergence of the Omicron variant. Moreover, participants widely cited business

contacts feeling confident that they would be able to pass on higher costs of labor and material to customers. Participants noted their continuing attention to the public’s concern about the sizable increase in the cost of living that had taken place this year and the associated burden on U.S. households, particularly those who had limited scope to pay higher prices for essential goods and services.

The FOMC also touched on an important point – that some of the factors that worked against inflation in the past – notably technology, globalization and productivity growth – might be diminishing. Currently wage growth is high while productivity is low. The Fed is especially worried that annual cost-of-living increases will begin to become a permanent part of the labor landscape, which will pull inflation above its 2% target.

The Fed also discussed balance sheet normalization. It is clear that they think the balance sheet is bigger than it should be, and they would like to wind it down at some point. They prefer to use the Fed Funds rate to manage the economy, given that they have more certainty about how it will work. In addition, their preference is to get rid of mortgage backed securities first. This is going to be a longer-term issue as they will probably first re-invest maturing proceeds to maintain the level of holdings, and then start to let them run off.

The FHFA announced new LLPAs for high balance and second homes yesterday. Upfront fees for high balance loans will increase between 0.25% and 0.75%, although first-time homebuyers with incomes at or below the area median income will have the fees waived. For second homes, the fees will be a function of LTV ratios, going from 1.125% to 3.875%. I have to imagine they are going to do something for investment property loans as well. On the bright side, this is a better approach than their previous attempt, which involved caps at the lender level.

We had some employment-related indicators this morning, which initial jobless claims back to pre-pandemic levels at 207,000. The Challenger and Gray job cut report showed 19,052 job cuts last month.

The ISM Services Index decelerated in December from its all-time high in November. Supply chain issues continue to be mentioned as a major constraint, along with rising prices and labor costs / supply.

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