Morning Report: The FOMC minutes underscore the hawkishness of the Fed.

Vital Statistics:

S&P futures3,864-12.75
Oil (WTI)74.32 1.48
10 year government bond yield 3.75%
30 year fixed rate mortgage 6.46%

Stocks are lower after stronger-than-expected labor market data. Bonds and MBS are down.

The economy added 235,000 jobs in December, according to ADP. This was above the 145,000 Street estimate, and is also above the forecast for tomorrow’s jobs report. Initial Jobless claims fell to 204,000 which signals the labor market remains tight. Finally, outplacement firm Challenger, Gray and Christmas noted 43,651 announced job cuts in in December.

The minutes from the FOMC meeting were released yesterday and they poured cold water on people hoping for a Fed pivot.

What about the dovish CPI reports in November and December? “Participants concurred that the inflation data received for October and November showed welcome reductions in the monthly pace of price increases, but they stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path. Participants noted that core goods prices declined in the October and November CPI data, consistent with easing supply bottlenecks…. Participants noted that, in the latest inflation data, the pace of increase for prices of core services excluding shelter—which represents the largest component of core PCE price inflation—was high. They also remarked that this component of inflation has tended to be closely linked to nominal wage growth and therefore would likely remain persistently elevated if the labor market remained very tight.”

In other words, the reduction in inflation is being driven primarily by easing supply chain issues which is old news. They see inflation as being driven by supply chain issues, housing, and wages. The supply chain issues are largely resolved. Housing-driven inflation will disappear by summer. The battle they are fighting is based on wages. As long as wage growth remains high, they are going to keep tightening. Below is a chart of average hourly earnings. We are in the low 5% range. They probably want to see that number closer to 3%. BTW the spikes up and down in the early days of COVID are lockdown-related noise.

The FOMC also noted that the Fed Funds futures were at odds with the FOMC, and that no members thought it would make sense for the Fed to start easing in 2023. Take a look below at the Fed Funds futures – the disconnect is pretty substantial:

The Fed also noted that financial conditions have eased, and that they don’t want a further easing. “Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”

Home prices declined 3.2% on a QOQ basis, according to the Clear Capital Home Data Index. We are beginning to see big declines out West, and MSAs like San Francisco are now flat on a YOY basis. Florida remains one of the best markets.

21 Responses

  1. Still digging what’s going on in the House. A return to Regular Order and a repowered committee framework would be a remarkable acheivement.


    • You may find this of interest, Justin Amash’s take on the whole thing.

      of note:

      “But over time, you have this system where fewer and fewer amendments are allowed, and eventually no amendments from the floor. And Nancy Pelosi served as Speaker for four years and didn’t allow any amendments to be freely offered from the floor. Totally anti-democratic, and totally against representative government. And it was a completely top-down system. And yet I still hear Democrats a lot of times defending her and saying, well, she’s so great and she did wonderful things. I think you should be as critical… if you’re critical of Paul Ryan, you should be critical of Nancy Pelosi. They both shut down the entire system.

      As a result, and you touched on this before, members of Congress have become performance artists because they don’t have anything else to do. What do you expect them to do if they can’t participate in the legislative process? They’ve just become mascots in this sense, right? They’re mascots for people back home. Well, this is our person who’s going there and presenting our views on Twitter or social media, or on TV. That’s all they do. They don’t participate in legislation. So don’t be surprised. And they’re going to go out there and basically serve in the same format that a lot of other commentators might serve. You know, they’re not going to be any different. They’re going to be public opinion personalities. And that’s what we have as Congress at this point.”


  2. Totally agree, it’s a dick move, especially when it’s busy.


  3. Really good read on the historical context:

    “The ‘Stolen’ Election That Poisoned American Politics. It Happened in 1984.

    The 1984 race for Indiana’s ‘Bloody 8th’ trained a generation of politicians in the scorched-earth tactics of recounts. Its legacy lives on in Trump’s ‘stop the steal’ rhetoric.

    By Michael Kruse
    01/06/2023 04:30 AM EST

    This week 38 years ago, in the first official act on the first official day of the 99th Congress, the Democrats in power did something nearly unprecedented in the history of the House of Representatives.

    Speaker Tip O’Neill started to swear in the members old and new, and House Majority Leader Jim Wright spoke up to stop him. “I object,” he said, “to the oath being administered to the gentleman from Indiana” — to Rick McIntyre, the Republican who had arrived at the Capitol with a certificate from the Indiana secretary of state saying he had beaten in the 8th district the incumbent Democrat Frank McCloskey, albeit by just 34 votes.”


  4. Like

  5. More proof that men make better mothers than women.


  6. Why does McConnell continue to get good press from the right? It’s obvious to anyone with a brain that Schumer is perhaps the most effective Senate Leader since at least Howard Baker in the early 80’s.


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: