Unprecedented (but we knew that)
January 12, 2022
–CPI today expected at cycle high of 7% yoy as Powell yesterday acknowledged that high inflation can cause problems and vowed to do something about it. Yields fell, the curve flattened. Tens ended at 1.744%, a pullback testing last year’s March high. Re-opening auction of 10s today, with 30s tomorrow. Beige book is also released in front of the Jan 26 FOMC meeting. Domino’s CEO Rich Allison summed up the situation: “We expect unprecedented increases in our food basket costs versus 2021.”
–New low in the 5/30 treasury spread yesterday at 56.5 bps. That’s about the same level, and going in the same direction, as it was at the start of 2018, when the Fed was simultaneously tightening and trimming the size of the balance sheet (as Mester recommends now). And the Fed hasn’t even STARTING hiking rates yet, though the idea of four moves in 2022 is being priced and accepted. EDH2/EDH3 settled exactly at 100 yesterday. Anyway, Q4 2018 culminated with a 20% drop in SPX, as Powell kicked off the quarter by saying “We’re nowhere close to neutral” and balance sheet selling was moved up to $50 billion per month in Oct 2018 (it had increased $10b per quarter).
–Of course in 2018 SPX went from just under 3000 to around 2400. And the Fed’s balance sheet in 2018 (which they thought was prudent to trim) was $4.4 trillion. At the end of 2021 the balance sheet was about double where it started 2018. And SPX pretty much got up to double from the end of 2018.
