Morning Report: Hawkish FOMC minutes

Vital Statistics:

S&P futures4,6931.2
Oil (WTI)80.092.11
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.

27 Responses

  1. Shut it the fuck down until we find out what’s going on!


  2. “AOC Lays Wreath At Her Grave On January 6th

    January 6th, 2022 –”


    • That is hilarious.

      She’ll probably respond by saying the Babylon Bee wants to fuck her.


      • That is a novel response from a politician to political criticism. Very Trumpian if you think about it.

        But Trump-style craziness is fine, highly desired, even, if it’s coming from the left side of the aisle.


    • i can only imagine what social media is like today. probably intolerable.


      • Like

      • It’s hilarious and one of the funnest days I’ve had reading, honestly. The faux earnestness of Progressives is truly wondrous. They’ll be in for a hard crash when the polling doesn’t change as they believe, with all their hearts, that polling is accurate.


        • It’s like she’s reading my mind!


        • She didn’t toss in the Redcoats burning DC during the War of 1812 because she’s a coward.


        • This article’s a hoot.

          Loved the “backsliding” minimization qualifier.


        • Why aren’t more Republicans taking what happened on Jan. 6 seriously?

          As I say often, these folks are narcissists if not sociopathic narcissists. And would be the first people defending January 6th if it had been a response to Trump beating Biden, even if the violence and damage had been far worse. And everybody right of center (and many people in the center) can see that clearly.

          Why aren’t more Republicans taking what happened on Jan. 6 seriously?

          But the other thing is: why isn’t this thing I think is SUPER important the only thing you are talking about? We ONLY have all the media focusing on January 6th 24/7 this week, and they’ve only constantly talked about it all year, while having memory-holed BLM riots that ended up with dozens of buildings in DC set on fire and far more damage. Also, we don’t care about the BLM riots generally, despite having in total killed and injured far more people and caused a billion dollars more damage. So you shouldn’t care about it, either, but you should TOTALLY care about the January 6th riots and agree with us that they are THE WORST THING TO HAPPEN EVER. Because that’s what we think so YOU MUST THINK IT, TOO.

          The narcissism is . . . impressive.

          But throughout all those difficult periods, we still had peaceful transfers of power.

          I’m not sure this is entirely true, although the violence and rioting has typically happened on or near inauguration. But also, is Biden president now or not?

          Free and fair elections were held even during the Civil War, and during the politically repressive period around World War I (and the 1918 flu pandemic).

          This is just an attempt to re-write history. And there were literally no elections during that time period that would meet the contemporary definition of “free and fair”–meaning, election month with ballots sent to everybody and folks sent out to harvest those ballots. But the south obviously didn’t get to vote during the Civil War, and were highly constrained afterwards. And also constrained voting.

          And while that unbroken record of peaceful transfers of power may be in real jeopardy now,

          How many Democrats does this pearl-clutching resonate with? 60%? 70%? Is this not exactly the same kind of taking-it-to-far that had people leaving the Republicans when they’d had enough of Pat Robertson and Jerry Fallwell?

          just some tourists who never had any chance of seriously disrupting the proceedings of government, even though footage and personal accounts of the events suggest otherwise.

          Do they, though?


        • I love how it never even occurs to the author to consider that the left is overplaying it.


        • That’s crazy talk. The left never overplays it. And if they lose an election after this kind of stuff, it’s because Republicans stole the election. Even the polls where Democrats are tanking indicate that, you know, Republicans are stealing Democracy and laws must be passed to stop that. Because, you know, that makes sense.


        • Remember what I said about the faux earnestness?


        • Is it faux or are they just so deep inside their bubble that the ability to think in a normal way about things isn’t an available function for them?

          This was FDR after Pearl Harbor, Lyndon Johnson after Selma, George W. Bush after 9/11.

          For example, we’re I to have such a thought, the first thing that would occur to me is that none of those people made that barn-burning speech a full year after the event. And that would give me pause. And then I would not make that comparison. I’d just stick to calling it a stirring defense of Democracy and America or something.


        • Is it faux or are they just so deep inside their bubble that the ability to think in a normal way about things isn’t an available function for them?

          It would be impossible for it to be otherwise. The left controls all 3 branches of government, culture, media, academia, K-12 education, social media, and the flow of information. They literally swim in an ocean of confirmation bias.

          And, they operate primarily from an emotional, not a logical center, which means solipsism is the dominant factor. They think they deserve for everyone to hold their POV.


  3. This isn’t wrong.


  4. Cause it was an act for their rube base in the first place?


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