Control Panel: rising interest rates

By now, everyone knows about how the Fed is planning to raise the Fed funds rate and reduce its “emergency” monetary stimulus by cutting back on its purchases of Treasury and mortgage bonds. This action hasn’t started yet. Fed assets are still climbing rapidly. The markets have responded to the jawboning. Imagine how they will respond when the Fed begins to act in earnest.

The Treasury yield curve has shifted upward along its entire duration. The real yield, which has been negative for many months, is finally slightly positive at the 30 year duration though still negative at all other durations.

The Fear & Greed Index was in Fear but the Stock Price Strength, Market Momentum and Safe Haven Demand showed Extreme Fear.

Inflation (CPI-U) is soaring. The “Sticky Price” Consumer Price Index less Food and Energy was the highest in 10 years.…

The Job Openings and Labor Turnover Summary (JOLTS) report for December 2021 showed the number of job openings was little changed.

The January 2022 Manufacturing ISM® Report On Business® shows growth despite supply and labor constraints with strong optimism. The January 2022 Services ISM® Report On Business® also shows growth with many constraints. The growth reading in January was lower than December in both cases.……

The SPX may be bouncing back from its January 2022 correction but it’s too early to say for sure.A slight amount of air has been let out of the bubble but it’s still dangerously inflated.

The NASDAQ index has broken through a support level and has a fundamental as well as technical reason to drop further – many tech companies do not have profits, let alone dividends, and are highly dependent on free money. They will go into withdrawal when the Fed’s crack cocaine is taken away. The same is true for junk bonds which are plunging.

The trade is risk-off as stocks and junk bonds are falling faster than the UST.

Gold, silver and copper are bouncing around in their channel. Oil and gas prices are spiking.

The Omicron spike is falling rapidly but deaths are still rising since they lag by a few weeks. By March, the spike should be largely behind us.…

Employers added 467,000 jobs in January and revised November and December upward. The U.S. economy has regained more than 19 million of the 22 million jobs lost in the early weeks of the pandemic.…

The GDPNow model from the Atlanta Federal Reserve estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 0.1 percent on February 1. That is a huge drop from earlier quarters which were in the 3% range. I don’t know if the model incorporated the upward revisions in jobs.

The METAR for next week is cloudy. On the one hand, the employment and economic numbers are strong. On the other hand, the Fed is due to start raising interest rates any day now.



Inflation report will be on Thursday. Trimmed Mean PCE Inflation Rate might have peaked in October.

Maybe 5 rate hikes totaling 1.5% this year. Similar to 2005 when FEDFUNDS went from 2.28 to 4.29. The Yield curve inverted in 2006. But the FED might try to avoid yield inversion this time around by limiting rate hikes.

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Trimmed Mean PCE Inflation Rate

Target Rate Probabilities
Current target rate of 0-25 bps
March 16th: 67% probability of 25-50 bps target rate
May 4th: 67% probability of 50-75 bps target rate
June 15th: 66% probability of 75-100 bps target rate
July 27th: 51% probability of 100-125 bps target rate
December 14th: 64% probability of 125-175 bps target rate…

The Yield Curve Market Valuation
“Since WW2 every yield curve inversion has been followed by a recession in the following 6-18 months”

Daily Treasury Par Yield Curve Rates…

   Date     1 Mo  3 Mo  6 Mo  1 Yr  2 Yr  3 Yr  5 Yr  7 Yr  10 Yr  20 Yr
 1/3/2005   1.99  2.32  2.63  2.79  3.10  3.28  3.64  3.94  4.23   4.84
12/30/2005  4.01  4.08  4.37  4.38  4.41  4.37  4.35  4.36  4.39   4.61
  change    2.02  1.76  1.74  1.59  1.31  1.09  0.71  0.42  0.16   -0.23
 1/3/2022   0.05  0.08  0.22  0.40  0.78  1.04  1.37  1.55  1.63   2.05
 2/1/2022   0.04  0.19  0.48  0.78  1.18  1.39  1.63  1.76  1.81   2.19
 possible   1.56  1.51  1.79  1.97  2.16  2.21  2.16  2.08  1.93   2.02