Morning Report: The markets are starting to price in a 50 basis point hike in March

Vital Statistics:

S&P futures4,407-14.2
Oil (WTI)87.120.33
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.78%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are down small.

The upcoming week will be dominated by the jobs report on Friday. The consensus is that January’s numbers will look a lot like December, with payroll growth of only 200k. The unemployment rate is expected to remain at 3.9%, however average hourly earnings are forecasted to increase at a 5.2% clip.

Aside from the jobs report, we will also the ISM data, construction spending, and productivity numbers. We don’t have much in the way of Fed-speak.

The construction spending report will be interesting given that lumber prices are back on the march, and skilled labor is still scarce.

Goldman is now forecasting 5 rate hikes this year, based on Friday’s employment cost index. The March Fed Funds futures are fully onboard with a rate hike, and markets are pricing in a 20% chance of a 50 basis point hike.

Look at the table below to get an idea of just how much the consensus has changed. At the end of the year, the market considered the March meeting to be a toss-up between no change and a 25 basis point hike. There has been a sea-change in opinion.

While the economic information that is transmitted by interest rates is highly distorted, it is interesting to watch the behavior of the yield curve, which is the difference between longer-term rates and shorter-term rates. As of right now, the 10-year is trading at 1.8%, while short term rates are zero. The consensus for the December meeting is a Fed Funds rate between 125 and 150 basis points.

This is a signal that the yield curve is going to flatten this year pretty dramatically. The steepness of the yield curve generally provides a signal about what the market is thinking regarding growth. When the economy is accelerating, investors generally rotate out of long-term government bonds and invest into riskier assets.

What we are seeing is a flattening yield curve, which is generally a signal for weaker economic growth. At the end of the year, the consensus for the Fed funds rate was 75 basis points and the 10 year was 1.63%. Now the consensus is for a 125 basis point Fed Funds rate and a 1.8% 10-year.

A flattening yield curve is a big signal that the market believes the current level of inflation is temporary and will return to its historical 2% level. It is also a signal that economic growth is going to decelerate as well.

I would caution that global central banks are managing interest rates pretty tightly, and much of the demand for Treasuries is artificial. The signal-to-noise ratio of the yield curve is not what it used to be, but it is something to watch.

36 Responses

    • What’s interesting is that this is the one working class labor protest that Jacobin has avoided covering so far.

      Liked by 1 person

    • “Canadians were shocked and frankly disgusted by the behavior displayed by some people protesting in our nation’s capital,” Trudeau said Monday.

      I’m sure, I’m sure, but you can only spend so much time saying “these gigantic masses of people who don’t like what we are doing are clearly terrorists or Russian bots or something, so just ignore them and obey” before some of the people originally disgusted start going. “Yeah, but, you know . . . they kind of have a point.”

      “I want to be very clear: We are not intimidated by those who hurl insults and abuse at small business workers and steal food from the homeless,” he said. “We won’t give in to those who fly racist flags. We won’t cave to those who engage in vandalism or dishonor the memory of our veterans.”

      My immediate assumption here is that (a) this didn’t happen, or something previously not racist has been deemed racist JUST IN TIME for this accusation or (b) there are agent provocateurs inserted, being racist and saying awful things SPECIFICALLY to provide grist for the press and the government to tar everyone who disagrees with them about anything as racist or awful.

      As Brent and other often said, always assume bad faith with the left. Certainly don’t feel Trudeau is acting in good faith here.

      Canada’s chief of defense, Gen. Wayne Eyre, said he was “sickened to see protesters dance on the Tomb of the Unknown Soldier and desecrate the National War Memorial.”

      Sounds familiar.


  1. Finally, the solution to inflation!


  2. Interesting the things the NYT will do to stay relevant:

    “The New York Times buys Wordle, the ultra-popular online word game”


    • Well, probably a better strategy that relying on making TDS a permanent feature of American society. Interesting their goal is 10 million digital subscriptions, and the two features mentioned are Cooking and Games.

      Also poked around some of the other WaPo articles. Jen Rubin has just gone full left in every way (which I’ve observed before) but I have a hard time seeing that as a sincere conversion. Seems like a conversion of convenience. Jonah Goldberg is still reasonably conservative regarding events that occurred before 2016. Although he’s joined Rubin in primarily bitching about Republicans, he doesn’t give a rubber stamp to every stupid thing the left does.

      Then there was an article about how awful Republican treat Democrat SCOTUS nominees that’s just delusional. Eh, there’s a market for it, I’m sure, but it’s all narrative-shaping in nature. The narrative in this case wanting to make sure nobody things the Democrats are mean to Republican nominees, while the Republicans are just HORRIBLE to the Democrat nominees.

      Cuz our side is all good, the other side is all bad, yada yada.

      And no discussion as to if the Court should have the kind of power it does. Everyone seems to be cool with that.


      • Waldman had a piece today on Democrats gerrymandering the heck out of NY.

        His take: Good.


        • Of course. D = Good. R = Bad. There are no principles. No over riding, neutral standards which everyone should observe for the good of society, the culture, humanity, and the body politic. There is only “our side=good, your side=bad”. They are 100% “our ideological side, right or wrong, but that’s silly to say because it is always right”. Not even “my party, right or wrong”, because the minute they have a maverick in their ranks, that maverick is functionally just like a Nazi.

          So: dark money is evil when Republicans use it, but essential to saving Democracy when Democrats/progressives use it. Lying about everything is necessary and good when Democrats doing it, an “authoritarian moment” when a Republican does it. Racism is not only good but a moral imperative when progressives do it, and when the right argues for “content of their character” style color-blindness, THAT is “white supremacy”.

          Eventually the double-standard wears thin for a lot of people. Either free speech is good, or it’s not. Either money in politics or bad, or its not. The whole “oh, but we’re fighting for Democracy, so our use of gerrymandering and voter suppression is GOOD! It’s easy to understand, you deplorables” eventually doesn’t sell even with people on your own side.

          You would think Trump would have been an object lesson: it is entirely possible to be “too much” even for people you consider your core voters. In 2020, Trump did better with every Demographic group except college educated white men. A group supposedly forever in the Republicans’ pocket.

          While I expect the “red wave” to be significant in 2022, I think it’s going to still be too small for the Democrats to do anything to explain away their losses with “there’s still so much white supremacy in America, that’s why we’re losing Hispanic and African American and Asian votes. Because all that white supremacy.”

          Too early to suggest that the GOP will win the presidency in 2024, especially if Trump gets the nomination, but at this point that seems like a real possibility. Even if it’s Trump. But if it’s Desantis? He’d really have to fuck up to lose against whoever the Democrats prop up.


        • The thing about 2024 and Republicans, whom among the likely candidates do you think will have the balls Trump has? All of them are consistent political insiders who’ve benefitted from the existing establishment. Trump is a known, known in terms of national power and a victim of the national security state, what else about him could be exposed versus anyone else?

          To me, that’s the crux of the issue, I don’t trust anyone to do the right thing at the expense of their re-election and “legacy” other than those that don’t really seem to care. On the negative side Trump would be a lame duck from the moment of a victory. That can be constricting or liberating, depending. My prediction? The team that scores the most points will likely win!


        • “Waldman had a piece today on Democrats gerrymandering the heck out of NY.

          His take: Good.”

          Which is fine to make a straight up partisan advocacy argument, i.e. Democrats should gerrymander because having more Democrats in office is good and is the end goal.

          The insulting part is his argument that it’s different than the Republicans gerrymandering because Democrats are only gerrymandering now so that they can get rid of gerrymandering later.


        • “But if it’s Desantis? He’d really have to fuck up to lose against whoever the Democrats prop up.”

          He’s gone a bit over the top recently. Early DeSantis was better than current DeSantis. Especially when you are more anti-vax than Trump himself.

          It’s better to be seen as opposed to Democratic mandates than simply wanting to replace them with Republican mandates.


        • Where is Desantis anti-vax? Where is Trump anti-vax? Being against a mandate is not anti-vax, nor is advocating therapeutics for those infected.


        • You can tell when web traffic slows down on lefty sites, the front pages of DKos and TPM are almost entirely about Trump. This one is a real doozy.


        • Indeed.

          It’s impossible for me to understate or downplay the importance of this moment, and I hope that my colleagues in the media — who too often over the last year have craved or even pretended about a return to the politics of “normal,” when we are nowhere near normal — will wake up and see this. Of course, Biden’s presidency deserves our full scrutiny, with praise for what’s gone right (an economic boom) and criticism for what’s gone wrong (broken promises on climate and student debt). But while Biden is seeking to restore democratic norms, a shadow ex-president — unpunished so far for his role in an attempted coup on Jan. 6 — is rebuilding a cult-like movement in the heartland of America, with all the personal grievance and appeals to Brownshirts-style violence that marked the lowest moments of the 20th century.

          An economic boom? Where? And criticism for what’s gone wrong doesn’t include COVID, inflation, shortages, or Afghanistan but does include “broken promises” on student debt and . . . climate? These folks seem . . . very out of touch, to me.

          Also, Jan 6th was a lot of things, but not an “attempted coup”. And I love the “brown shirts” style violence. Which means, “looking like they might be violent the way antifa actually was, but towards our side, not theirs, in which case it’s just social justice”.

          But this is the best part: There’s no sense that these are the same people who regularly intimidate elected officials with death threats, come armed and ready to shoot up state capitals, plan to kidnap and execute state governors, fly Nazi and Confederate flags, and spit hatred at Jews and people of color in the name of white supremacy. No acknowledgment that these are the very same people Trump wants to turn loose on American society if he’s not treated like he’s above the law; turned loose not to peacefully “protest” or exercise their right to free speech, but to intimidate, attack and, if necessary, kill other Americans.

          They live in a LARPing fantasy world.


        • Desantis is only anti-vax by the new definition, which is “if you are against vaccine mandates, you are anti-vax”. But he was coy about sharing if he had had the booster yet, which just says: “I got the booster but I’m worried potential voters will be upset that I got the booster” or something.

          But progressives have indeed made the argument that being against vaccine mandates is properly defined as “anti-vax”.


        • I agree, that’s the left doing. I’m not so sure Desantis is/was being coy about the booster so much as the media is being coy about reporting what he says about it to maintain the narrative that he’s anti-vaxx. At since even before the election Trump has touted the vaccine and the booster, he brags about developing it as if he was in the lab himself. I don’t get the Trump is anti-vaxx at all.


        • Trump is not anti-vaccine but he also opposed the mandates and in the lingua franca of progressives that now equals anti-vaxxer. Same way racism is now defined as white people oppressing people of color; there is no other mode of racial discrimination and in fact it is racist for white or white-adjacent people so say so.


        • That Deathsantis narrative won’t survive a general election.

          And not sure how consistent they will Perdue it. Early indications of Dems running in 2022 seem to suggest (or so I’ve read) that they are doing their best to avoid COVID as a campaign issue.


        • McWing:

          Where is Desantis anti-vax? Where is Trump anti-vax?

          Precisely the questions I was going to ask. Neither of them is “anti-vax”.


        • You need a more current dictionary. Today’s definition defines “anti-vaxxer” as anyone who votes Republican or has ever listened to The Joe Rogan Experience.

          Listeners to Jordan Petersen are outright Nazis. But actually racist Nazis, not non-racist Nazis like Hitler.


        • Agreed. Still, I’m expecting he’ll be generally more attractive if he runs for president than the alternatives. But everything can always change.


  3. “Downplays non-violent dangers.”


    • Double-standard, you suggest?

      I loved this reply. The protests aren’t peaceful because they did not apply for the appropriate permits.

      Words mean nothing.


    • The left believes that protest is a technique that they are only permitted to use.


    • Replace Ottowa with BLM and see how the same piece plays.


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