Stocks and Mortgage Bonds are both lower so far this morning after news that President Trump announced that his nomination for the next Fed Chair would be Kevin Warsh. Even though Warsh has said that the Fed needs to be cutting faster, he is being viewed by the markets as “less dovish” than both Rieder and Waller, hence the slight selloff. Bonds appear to be off their worst levels and settling down, however.
We have always felt that Warsh would be a great Fed Chair, and Barry even said months ago that he thought he would be the pick. Warsh has had experience on the Fed and served on the board of Governors from 2006 to 2011. He has also been very critical of the current Fed and their handling of monetary policy, leading to the huge rise in inflation during their watch.
We believe that Warsh will be more forward looking and see through some of the lags in inflation, as well as the overstatement in the jobs figures.
Thankfully, a deal appears to have been agreed upon yesterday to avert a partial government shutdown. The agreement would fund all of the government except for the Department of Homeland Security through September. The Department of Homeland Security would operate on a two-week stopgap bill, to buy time to negotiate changes. There is a vote in the Senate today around 11:30am ET and then likely on Monday in the House to officially keep the government fully open.
Producer Price Index
The December Producer Price Index was released, showing that headline inflation rose 0.5%, which was more than the 0.2% expected. Year over year, it remained up 3%, but was expected to decline to 2.7%.
Core Producer Prices, which strips out food and energy prices, rose 0.7%. That was much higher than the 0.2% expected and caused the year-over-year figure to rise from an upwardly revised 3.1% to 3.3%, but the market was expecting it to fall to 2.9%.
Interestingly, goods prices were flat, even despite the rise in precious metals. Since this report they have corrected over the past few days, but that was not captured here. Most of the rise came from services, and specifically machinery and equipment wholesaling margins.
Because the rise was narrow in scope and due to one area, the Bond market did not react, but was lower to begin with after Warsh’s announcement.
News Next Week
Tuesday: JOLTS
Wednesday: ADP Employment Report, Mortgage Apps
Thursday: Challenger Job Cuts, Jobless Claims
Friday: BLS Jobs Report
Technical Analysis
Mortgage Bonds are off their worst levels and sitting right back on support at the 25-day Moving Average. We do have to watch this level closely, because if they break beneath it, there is 23bp of room to the downside until the 50-day.
The 10-year is slightly higher but off its worst levels. Yields are still trading above the 200-day Moving Average, which is a negative, but they have found a temporary ceiling at 4.25%. If that level is broken, the next stop is 4.30%.
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