Maintaining financial market stability is a Fed mandate

Outlook: A small number of releases today--the Empire State manufacturing index, NAHB housing market index, and late in the day, TICS. Also, Opec issues its monthly report. 

Nobody has a crystal ball, but its seems blindingly obvious that the rise in yields is here to stay this time and while not likely to advance much further until that March FOMC comes into sight, the prospect of rising rates is going to trigger a big stock market response—downward. This is not to say the bond market is becoming an alternative to equities—the real return is still negative even at 1.8%.

Assuming this S&P and Dow nosedive this week, we will start to see two things—first, the Fed will draw in its horns a little and remind everyone that it’s data-dependent and upcoming data may very well show inflation is moderating. That’s going to be a tough row to hoe when oil is misbehaving, but maintaining financial market stability is a Fed mandate, and while stability refers to the money and bond markets, not the stock market, the great majority think it includes the stock market or should.  

As for measures of inflation, we don’t get the Michigan inflation expectations until Jan 28—it was 4.8% in the preliminary last week. Trading Economics sees it ticking up to 4.9%. Analysts can try to find inflation forecasts embedded in all kinds of data, especially things like prices paid in the PMI’s.

But the public and the financial markets are not going to be fooled. You can’t have scare stories about shortages and price rises for weeks on end without the chickens coming home to roost. The delayed response to rising inflation in the bond market is a curiosity—it may even display confidence in the Fed—but the extreme reaction is overdue. Taking 7% inflation in stride was always peculiar.

At a guess, the dollar will resume its upward trajectory—but not, remember, in a straight line.

Tidbit: Next week (Jan 24), Italy votes on a new president, with current PM Draghi expected to run (but a win not assured). Even the NYT is worried about Italy backsliding into its customary political mess.

Tidbit: You don’t have to be a tree-hugger to worry about man’s effect on the environment. In recent years Oklahoma’s earthquakes went from zero to thousands due to fracking. Now the WSJ reports earthquakes in Texas with magnitude 3 and more in the Permian Basin was 176 last year from 51 the year before and 9 in 2019. “Shale companies in West Texas will have to move millions of barrels of wastewater that surfaces from oil wells. The growing number of earthquakes led state regulators to stop companies from pumping as much water underground, where it can aggravate tectonic fault lines.

“Trucking out all the water could increase Permian producers’ collective costs, conservatively, by more than $200 million a year, according to Source energy. Companies are also considering piping it out or recycling it. If they can’t dispose of the water, they might have to curtail tens of thousands of barrels a day of oil production.” Well, California needs water.

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