Real yields have moved higher, surging, actually, to start this year (up until more recently, that is). The 5-year TIPS rate has gone from ungodly ugly mid-November, sunk down to -191 bps, to a still-awful but much less so -130 bps as of today. That’s a 61 bps move in less than two months, thirty of those coming since the end of December.
Good news? Something else?
No sense in dragging this out, spoiler alert, the answer is quite clearly something else. Unless you take the Fed’s rate hikes for good news. Given recent history, as I’ll go through briefly, there’s simply no reason to.
The FOMC’s rate hikes – both in action as well as perceived upcoming action – influences curve dynamics nominally, as noted previously, but also TIPS, too. This non-economic interference is sharpest at the front, because of all the reasons I spelled out for the nominal yield curve.
Over the same recent timeframe as the 5s TIPS, the 10s have added significantly less while the 30s even less still; far more buoyant only up front. Just like flattening on the nominal curve, the FOMC is pushing down the prices of inflation-protected securities for reasons that have nothing to do with inflation protection; or real growth prospects.
Real yields certainly weren’t rising at the same time as omicron fears were reaching their peak. Hawkishness from November on, however.
Again, quick review of history shows this is the established pattern and what anyone should come to expect. Back during “globally synchronized growth” of 2017, the 5s real yields moved much more than either the 10s or 30s, eventually colliding in 2018. Was that the market really saying growth expectations were materially improving…in 2018?
Obviously not, this was instead the bottom-up influence of rate hikes – until even those were overcome during that year’s landmine.
What about the previous rate hike cycle? No surprise, it worked out in exactly the same style.
The 5s TIPS go up more than the 10s (or 30s), eventually they collide and both rise but not because of rising growth prospects only non-economic policy interference. Had the TIPS market been pricing a far better forward real economic growth picture…in 2006? The answer like in 2018 was a solid, “no.”
It should be repeatedly pointed out how in both of those cases the nominal yield curve had relentlessly flattened in the same way as TIPS.
Honestly, the most powerful big picture message delivered by the less-influenced 10-year real yield is this one:
Profound change in real yields? Oh yes, just not anything recent.
What we’re seeing in all facets of the Treasury markets is just commonplace to rate hike cycles. I write about the deep history (dating back to the American Revolution!) behind inflation-indexed securities in more detail elsewhere, but arrive at this same conclusion anyway:
Was real growth potential that much better during the middle 2000’s, the very mania of the housing bubble? No. What had changed was Alan Greenspan’s and then Ben Bernanke’s series of seventeen 25-bps rate hikes. These had altered the nominal frame of reference for the short end of the whole Treasury curve which anchors the choices made by TIPS buyers and holders.
Jay Powell’s Fed is about to do the same thing, and for him for a second time. He just doesn’t learn. The fact that neither inflation breakevens have budged (see: below) along with similar facts of how the TIPS real yields behave leave us with a useful process of elimination which is the same for each of these previous times in history.
Are real yields signaling some profound change? Only if you consider rate hikes profound; merely a non-economic frame of reference (and, to be perfectly clear, what I mean here is all about interpreting these prices, rates, and signals in the context of macro; obviously, there are vastly different considerations when it comes to investing and investments). As far as the real economy, either inflation or growth, not at all.
Neither growth nor inflation, the Fed’s gonna Fed. What’s changed at the start of 2022 is as omicron fears fade fast the path forward for rate hikes has cleared. Chairman Powell himself has said multiple times the pandemic is the only thing which would change his and the FOMC’s collective mind. At least until the real pressures on the real economy reasserts themselves yet again.
AT&T down 10% despite topping estimates
AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribe
AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribers. Similarly, the company beat its high-end outlook for international HBO Max and HBO users with almost 74 million subscribers as of December 31, 2021.
CEO John Stankey said:
We ended 2021 the way we started it – by growing our customer relationships, running our operations more effectively and efficiently, and sharpening our focus. Our momentum is strong and we’re confident there is more opportunity to continue to grow our customer base and drive costs from the business.
Q4 2021 revenue dropped 10% YoY
Consolidated revenue in Q4 2021 was $40.96 billion beating consensus estimates $40.68 but dropping 10% YoY, which reflects the impact of divested segments and low Business Wireline revenues. In the third quarter, the company divested US Videos, and in Q4, it divested Vrio. The drop was partially offset by high Warner Media revenues, recovery from pandemic impacts, and high Consumer Wireline and Mobility revenues. Stankey commented:
We’re at the dawn of a new age of connectivity. Our focus now is to be America’s best connectivity provider and also ensure our media assets are positioned to grow and truly become a global media distribution leader. Once we do this, we’ll unlock the true value of these businesses and provide a great opportunity for shareholders.
AT&T reported Q4 net income (loss) attributable to $5 billion or $0.69 per diluted shared share. On an adjusted basis, including merger-amortization fees, a share of DirecTV intangible amortization, gain on benefit plans, and related items, the company had an EPS of $0.78 topping consensus estimate of $0.76 per share.
AT&T had total revenue of $168.9 billion in 2021
AT&T’s consolidated revenues were $168.9 billion in 2021, compared to $171.8 billion a year ago, reflecting the split of the U.S Video division in Q3 2021, as well as the effects of other divested operations. However, higher revenues in WarnerMedia and Communications somewhat offset these declines.
For the full-year, net income (loss) attributable to commons shares was $19.9 billion or $2.76 p were per diluted share. On an adjusted basis, FY 2021 earnings per share were $3.4.recovery pandemic
New home sales surge, while house price measures decelerate; expect deceleration or even downturns in each
– by New Deal democratSince I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly…
- by New Deal democrat
Since I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.
Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says “Economic Slack Now Absorbed”
Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"
For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analyst
For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analysts expected. The bank also said that while it is keeping holdings on its balance sheet constant, once it begins rising interest rates, it "will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."
In its statement, the Bank of Canada said that with overall economic slack now absorbed, "the Bank has removed its exceptional forward guidance on its policy interest rate" but the Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant
Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.
Some more from the BoC:
The global recovery from the COVID-19 pandemic is strong but uneven. The US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector. Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions. As well, oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19. Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions. Overall, the Bank projects global GDP growth to moderate from 6¾ % in 2021 to about 3½ % in 2022 and 2023.
On inflation, the BoC said that "CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation."
The central bank also said that it will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.
A redline comparison of the BoC statement:
Commenting on the move, Bloomberg's Ven Ram writes that this is a lot more dovish outcome from the Bank of Canada than one might have imagined. Not only did the central bank hold its rate, but it didn’t paint itself into a corner on when it may push the button: “Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.”
Add to that this guidance on balance-sheet runoff: “The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”
Net-net this isn’t screaming, “Buy the loonie” and sure enough, in immediate reaction, the canada 2Y yields declined and the loonie weakened, dropping from 1.2560 before the BOC to 1.2640 before paring some of the losses, amid some trader disappointment that the bank did not hike.
* * * Earlier:
In what may be a teaser of what to expect from the Fed later today, the Bank of Canada rate decision is due at 10:00am EST followed by Governor Macklem press conference at 11:00am EST. While the bank is expected to leave rates unchanged, there is the risk of a surprise rate hike. Indeed, about a quarter, or 7/31 analysts, surveyed by Reuters expect a hike. If left unchanged, attention turns to guidance.
Below is a recap of what to expect from the BOC courtesy of Newsquawk
- The Bank of Canada is expected to leave rates unchanged at 0.25% although there is the risk for a hike with 7/31 surveyed analysts expecting a 25bp hike to 0.50% at the January meeting, ahead of the current BoC guidance for the middle quarters of 2022.
- If the rate is left unchanged, attention turns to guidance to see whether this is bought forward to the end of Q1 (ie March).
- Market pricing looks for rates to be left unchanged, although this has unwound heavily from last week which saw up to a 90% chance of a 25bp hike in January after the BoC survey and CPI data.
- The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised 0.1% higher for 2022 but revised down by 0.1% in 2023.
LIFT-OFF: The latest Reuters survey saw analysts generally believe the BoC will leave rates unchanged in January, although 7 of 31 surveyed expect a hike will occur. Therefore, the expectation for January is for rates to be left unchanged, although the risk of a hike is there. If the rate is left unchanged, attention will turn to its forward guidance, which currently looks for lift-off “sometime in the middle quarters of 2022”. If it is bought forward to the end of Q1, it will signal a March lift-off is coming. Analysts are currently split on whether the BoC will hike in March with 16/31 calling for rates to be left unchanged again, while the other 15 expect it will rise to 0.50% or more, however, all analysts noted the risk to the pace of rate hikes this year is that they come faster than expected. The median forecast is for the BoC to raise rates to 0.75% by the end of Q2 2022.
SURVEYS: The Business Outlook Survey sounded the alarm on inflation with 67% of firms expecting inflation to be above 3% over the next two years, although most predict it will return to target within one to three years. It also noted that demand and supply bottlenecks are expected to keep upward pressure on prices over the year ahead. However, the overall survey saw a continued improvement in business sentiment to see the indicator hit a record high, although it was held back by labour shortages and supply chain issues. Note, the Canadian labour market is back at pre-pandemic levels and has been for a while. A separate BoC survey showed consumer inflation expectations hitting a record high of 4.89% over the next year, noting most people are more concerned about inflation post-COVID than before, where consumers believe it is more difficult to control. Analysts at ING highlight that the latest survey saw respondents note they expect supply disruptions through H2 this year and that labour shortages are constraining output. ING write “where the economic outlook is robust, the jobs market is red hot and inflation is at generational highs, we see little reason for the BoC to delay tightening monetary policy.” Meanwhile, ING adds that Ontario has announced a three-step plan to allow a full reopening from COVID restrictions from the end of January “which should be the final green light for the central bank to hike rates 25bps”.
INFLATION: The latest CPI report saw the headline M/M and Y/Y metrics in line with expectations, although the core Y /Y measure saw a sharp rise to 4.0%, while the BoC eyed measures rose to 2.93% from 2.73%. Analysts at RBC, who expect the Bank to leave rates unchanged at this meeting, say “Inflation trends have evolved largely in line with the BoC’ s forecasts from the October Monetary Policy Report (4.8% vs actual 4.7% for Q4)”. However, this still shows price growth above the 2% target rate and RBC’s own tracking suggests not all that pressure can be explained by pandemicrelated distortions. As such, RBC expects rates to rise soon and believe the BoC will use this meeting to signal the start of lift-off.
MPR: The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised higher for 2022, before being revised marginally lower in 2023. In October, the MPR saw 2021 growth at 5.1%, 2022 at 4.3%, and 2023 at 3.7%. CPI was seen at 3.4% for 2021, while 2022 is expected to be revised higher to 3.5% (prev. 3.4%), and 2023 CPI is expected to be revised down to 2.2% from 2.3%. In the October MPR, the output gap was estimated at about -2.25% to -1.25% and is expected to close sometime in the middle quarters of 2022
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