Good Monday AM from your Hometown Lender,
Bonds are catching a bid today despite no data.
The 10-yr is down to 4.10% and right in the middle of the current trading channel. Bonds improving is not typically the case at the beginning of a Fed meeting week, as traders tend to sit on the sidelines waiting for the Fed news. With no data today, the markets seem to be trading on yesterday’s news from China that their largest property developer, Evergrande, was being wound down. That’s a huge loss across stocks and bonds, and this type of uncertainty often gives bonds a boost. We will see how long it lasts.
This is a huge news week and likely the biggest of the whole month of February.
Tomorrow, we have the Jolts report and consumer confidence, Wednesday is the Fed rate decision, no change is expected in January (markets have it at 2% for this meeting) however there is a 50% expectation for March (and a 90% expectation for May). Additionally on Wednesday we have ADP Payroll and Chicago PMI, Thursday is Bank of England rate decision, jobless claims, construction spending, the Friday is a monster day with all the Jobs report data. Like I said, busy week. It is tough to float through much of this week unless you have lots of time to recover. I think we do come through this better than we started the week, but there are no guarantees.
On inflation:
Federal Reserve officials start the year with a problem they would ordinarily love to have: Inflation has fallen much faster than expected. It does, nonetheless, pose a conundrum. The reason: If inflation has sustainably returned to the Fed’s 2% target, then real rates—nominal rates adjusted for inflation—have risen and might be restricting economic activity too much. This means the Fed needs to cut interest rates.
The Fed won’t cut at its two-day meeting ending this Wednesday because the economy has been growing solidly. Instead, officials are likely to take a symbolically important step by no longer signaling in their policy statement that rates are more likely to rise than fall. Ditching this so-called tightening bias would affirm that officials are entertaining lower rates in the coming months.
The Commerce Department’s measure of inflation showed Friday that consumer prices rose 2.6% in December from a year before, significantly smaller than the 3.4% jump registered by a Labor Department measure released two weeks ago. What gives? Labor’s consumer-price index, or CPI, typically runs a bit higher than Commerce’s personal-consumption expenditures (PCE) price index, but the current gap is at the high end of the range.
Please remain safe and healthy, make today great!
