Morning Report: The Fed spooks the bond market

Vital Statistics:

S&P futures4,38442.2
Oil (WTI)88.51.13
10 year government bond yield 1.83%
30 year fixed rate mortgage 3.77%

Stocks are higher this morning after a stronger-than-expected GDP report. Bonds and MBS are down.

The Fed maintained the Fed Funds rate at current levels, but cleared the decks for a rate hike at the March meeting. It will continue to lower its purchases of Treasuries and MBS. Bonds and MBS sold off in the aftermath of the statement, and the implementation note indicated that the Fed plans to begin balance sheet reduction. In addition, it plans to eventually hold primarily Treasuries, not MBS: “In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.” IMO that statement about minimizing effect on credit allocation is an indirect statement that the Fed is uncomfortable with 20% home price appreciation. MBS got clobbered on the announcement yesterday, dropping about a point, while the sell-off continues today. MBS investors are understandably gun-shy about catching a falling knife, so it might take a day or two for things to settle down.

Economic growth rebounded in the fourth quarter, as GDP increased at a 6.9% annual rate. Inventory build was the primary driver of growth, especially motor vehicles. Consumption also rose, which was dominated by services. The PCE Price Index rose 6.5%, which is a red flag for the Fed. Ex-food and energy it rose 4.9%, well above its 2% target rate.

So if the economy is growing at such a high rate, why doesn’t it feel like it? The answer is in real disposable income, which decreased 5.8%. Real disposable income reflects the inflation rate and wage increases. If wages don’t keep up with inflation, it creates a surly consumer.

In other economic news, durable goods orders fell 0.9%, while core capital goods (a proxy for business capital expenditures) was flat. Initial Jobless Claims came in at 260k.

Pending Home Sales fell 3.8% in December, according to NAR. “Pending home sales faded toward the end of 2021, as a diminished housing supply offered consumers very few options,” said Lawrence Yun, NAR’s chief economist. “Mortgage rates have climbed steadily the last several weeks, which unfortunately will ultimately push aside marginal buyers.” Sales are down 6.9% YOY. While it is hard to believe if you live in the Northeast, we are close to the beginning of the Spring Selling Season.

9 Responses

    • Illing is precious:

      Okay, but between what Democrats say and what the voters hear is a layer of conservative media that exists solely to scramble Democratic messaging. A messaging campaign only works if it allows you to dictate issue salience, and I don’t think Democrats can reliably do that anymore.

      Republicans have never been able to dictate issue salience, ever, because the entire media leans left. These people think if they don’t have 100% control of the megaphone they can’t get their message across.


      • What should really give Republicans hope is that people like Illing are the future of the Democratic party and people like Carville are the past.


        • The problem with Progressives is that they eventually piss everybody off before they get to implement their utopia.


    • You know who is paying attention to these races? The Republican Party. Last I checked, Republicans raised $33 million for secretary of state races around the country. The Democrats had until recently raised $1 million. I think it’s now up to $4 million. That’s the story, right there. That’s the difference, right there. Bitching about a Democratic senator in West Virginia is missing the damn plot.

      Well, I agree 100% with that, but it’s not like the Republicans got there first. Progressive have been carrying on a long march through city councils and school boards and attorney general’s offices. In this case it may be they just assumed every secretary of state they’ve got was a guaranteed win. Not because they don’t think about getting an advantage at lower levels.

      That being said, the party has been blowing money on unwinnable races–because of Twitter-visibility and the opinions of late night talk show hosts–for a hot minute now.

      But Brent is right, this stuff is just delusional:

      But I’m not at all convinced that Democrats can message their way out of this problem. Republicans have built a self-contained media ecosystem that delivers their version of reality straight to their voters, whereas the Dems still rely on traditional media to communicate their message. That’s the whole damn game, James. In the end, what voters hear is more important than what Democrats say, and they’re not hearing what Democrats want them to hear.

      I get that there is a conservative ecosystem (which includes libertarians and classical liberals and anybody who doesn’t agree with Blue Checkmark Twitter on everything) out there–and there has been pretty much since Rush Limbaugh got syndicated and Fox News got on the air.

      But studies show the left tend to be more insular and single-minded in their media consumption than the right. Conservatives/Republicans spend more time watching CBS/ABC/MSNBC/CNN than Liberals/Democrats spending watching Fox or listening to Ben Shapiro. It’s not the mediation of the right wing media machine, it’s their crappy message that is almost designed to appeal to only 7% of the country and alienate everybody else.

      The problem is that the right can get their message out, and if often has traction because it’s often more fact-based. It also is often about showing middle America what the left is doing and saying that they’d rather not have aired publicly. It’s not because mean conservatives are keeping them from getting their message out.


      • Republicans cannot avoid left-wing messaging – it is everywhere. But Democrats can avoid right-wing messaging.

        Which is why Republicans understand the left’s arguments extremely well, while Democrats only hear strawman arguments as summarized by the leftist media.


  1. Heyo!


    • US convictions. There was one UK conviction, of Tom Hayes, which stood. He served 11 years and then got out on a reduced sentence, but not overturned.


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 )

Facebook photo

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

Connecting to %s

%d bloggers like this: