ECI disappoints, front-end BID; 'somethin' remarkable'; QE flow-slo-mo-jo monitor
First from the sellside, an instant reaction TO the 830a ECI data,
BMO: ECI Disappoints; Front-end Treasuries Rally
The Employment Cost Index in Q4 came in at 1.0% vs. the 1.2% consensus and Q3's 1.3% print. Wages climbed 1.1% QoQ bringing the yearly pace to 4.5% while benefit costs were up 0.9% QoQ. A moderation in labor costs as 2021 came to a close, but still at a pace that reinforces the more hawkish tone struck by Powell at the press conference on Wednesday. In terms of 'old' information that was contained in yesterday's GDP release, Personal Income disappointed at +0.3% Dec vs. +0.5% consensus and +0.5% Nov. Spending matched estimates at -0.6% MoM vs. +0.4% Nob. Real Spending declined -1.0% vs. -1.1% anticipated. As for inflation, core-PCE YoY gained more than anticipated to 4.9% vs. 4.7% Nov and 4.8% consensus; although the Dec MoM increase of +0.5% matched expectations. The Dec savings rate bounced to 7.9% as spending slipped; this following 7.2% in Nov but it is well off the 10.5% July level. Overall, a marginally disappointing release that does nothing to strengthen the case for a 50 bp hike in March…We'll be watching the choppiness in equities for any further skittishness in risk assets as investors continue to digest the Fed's decidedly hawkish tone..
In otherwords, STONKS (or, Aha! Interest rates do matter?).
Next I wanted to pass along a couple things from one of the largest German banks with several fan favorite analysts.
First is “Something remarkable” which notes,
The below chart shows something remarkable: despite massive inflation surprises and a big hawkish shift from the Fed, expectations for where US yields will be in 10 years time are nearly 100bps lower compared to last March. This was the time of peak fiscal and vaccine optimism, when the so called "gangbuster" economy was about to take-off. As the market has brought down longer-dated yield expectations, it has of course also dramatically accelerated its expectations of imminent Fed hikes. We have been emphasizing for a while that this twist flattening of the yield curve is at the crux of the very unusual (and unhealthy) paradigm we are in. This is not a world of booming demand and shoppers out to party. It is one where the supply side has crunched the economy so much that inflation has shown up earlier than expected: GDP is barely back to the pre-COVID trend. The best thing that can happen this year is a huge recovery in labour and global goods supply that brings down inflation quickly and raises expectations of trend growth. Otherwise the Fed will have to slow down demand to match it with weak supply. It is supply that will determine just how late-cycle the economy is and whether the curve continues to flatten as aggressively as it has. As we've argued before, so long as it does, the USD will continue to rally and the market will fear slowing growth. It will be a long year.
Next up is another CHART showing,
A rapid turnaround in QE flows seen over 2022
Our QE flow monitor tracks government bond purchases and reinvestments by the Federal Reserve, ECB, BoE and BoJ, expressed in dollars, and in 10Y equivalent terms. From a relatively steady run rate over 2021, this is now set to decline very sharply over the course of 2022. We incorporate our economist expectations where a) the Federal Reserve is expected to begin balance sheet drawdown over the summer, b) the ECB which is seen stopping purchases by Q3, c) the BoE which is expected to cease reinvestments from March and d) the BoJ where steady purchases are assumed, though even here our economist notes a shift in the YCC target yield could, over the longer term, result in a decrease in purchases of the 5-10y sector. In isolation this chart would imply a decompression of term premia and a steepening of the curve, though as we know this time the rapid pivot is to enable the rate hikes that have started being priced in. As outlined here, given the scope for accelerated hiking cycles, our trades were rotated to shorter maturities.
Stay safe …