Market focus: FOMC this afternoon

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Published Date 1/26/2022

Quiet opening this morning ahead of the FOMC this afternoon. Stock indexes rallied in futures trading early, the DJIA +300, NASDAQ +263 at 8 am ET.

MBA mortgage applications last week dropped 7.1% on a 13.0% decline in re-financing, purchase apps also slipped 2.0%. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 3.72% from 3.64%, with points decreasing to 0.43 from 0.45 (including the origination fee) for loans with a 20% down payment. That rate was 77 basis points lower the same week one year ago, according to the MBA. Not exactly a surprise.

The FOMC this afternoon is widely expected to confirm the first rate hike at the March meeting. The anticipation the Fed will start increasing rates has already been discounted in current interest rate levels. What we want to see and hear this afternoon is any deviance from what markets already believe, more specifics on reducing the Fed’s balance sheet. What will the statement and Powell say about the inflation outlook, does the Fed still believe inflation will cool later this year, will the Fed admit wages pressures are increasing?

On Friday we will get two more inflation reads. Dec personal income and spending and the Q4 employment cost index. In the personal income and spending is the PCE, the Fed’s preferred inflation gauge. Dec personal income expected +0.5% up from 0.4% in November, personal spending expected +0.5% down from 0.6% in November; Dec PCE (personal consumption expenditures) expected to have declined to +0.4% from +0.6% in November, yr./yr. PCE 5.8% up from 5.7% in November. The core PCE (less food and energy) +0.5% unchanged from November, yr./yr. +4.8% from +4.7%. The Q4 employment cost index expected at +1.2% and down from +1.3% in Q3; yr./yr. +4.1%, higher than +3.7% in Q3.

Basing inflation on consumer prices and wholesale prices of goods and services could slow as supplies increase but its wages that won’t slow. Skilled workers are hard to find and competing for workers is increasing wages at a faster pace than what was expected just six months ago. It isn’t likely to slow anytime this year as far as we can see. More than anything else wage pressures are a key for why the Fed is concerned and will increase rates this year. Businesses across the country have been bidding up wages to attract and retain employees. For many companies, that’s feeding into higher prices for consumers. Over half of CEOs globally expect elevated inflation to last into 2023 or beyond, according to a survey by the Conference Board.

At 9:30 am the DJIA opened +294, NASNAQ +318, S&P +59. 10 yr. 1.78% unch. FNMA 3.0 30 yr. coupon +6 bps (at 10 am unchanged from 9:30 am yesterday).

At 10 am Dec new home sales, expected to have increased to 760K units from 744K in November as reported sales were +811K but November revised down from 744K to 725K.

Expect the usual volatility this afternoon between 2 pm and 3:30 pm after the policy statement and Powell’s press conference. Rate markets have become extremely bearish; how the policy statement reads and what Powell says will tell us whether rates have exceeded the Fed’s plans. Technicals for the very near term are at neutral readings, the 10 trading at its 20 average and the 9 day relative strength index still slightly negative but hovering at its neutral 50 reading.

Source: TBWS

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