Morning Report: Fed hikes rates as expected

Vital Statistics:

Last Change
S&P futures 2786 8
Eurostoxx index 389.9 1.7
Oil (WTI) 67.03 0.39
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.61%

Stocks are higher after the FOMC raised interest rates a quarter of a point. Bonds and MBS are up.

As expected, the Fed raised the Fed funds rate by 25 basis points to a range of 1.75% – 2%. The economy is clicking on all cylinders, with unemployment down, consumer spending up and business investment increasing. They took up their estimates for 2018 GDP growth to 2.8% from 2.7%, took up core PCE inflation to 2% from 1.9% and took down their unemployment rate forecast to 3.6% from 3.8%. The dot plot was increased slightly and the Fed funds futures shifted to a 60/40 probability of 2 more hikes this year.

Bonds initially sold off on the announcement, touching 3% at one point, but have since rallied back. The ECB also announced that it will stop buying bonds in September, depending on the data. Bunds are rallying on that statement and the 10 year could be rallying on the relative value trade. The Fed noted that longer-term inflation expectations have not changed, and they didn’t change their outlook for inflation from 2019 onward. One other thing of note: the Fed is going to start having press conferences after every meeting in order to disabuse people of the idea that the Fed can only hike in December, March, June and September.

Jun-Mar dot plot comparison

In other economic news, initial jobless claims fell to 218,000 last week, while retail came in way higher than expected, rising 0.8% for the headline number and 0.5% for the control group, which excludes gasoline, autos and building materials. Restaurants and apparel were the big gainers, increasing 1.3% and 1.5%. Consumer discretionary spending is back, as the FOMC statement indicated.  Finally, import and export prices were higher than expected, with increasing energy prices pushing up imports and higher ag prices increasing exports.

Outgoing Republican Congressman Darrell Issa is supposedly one of the finalists who will be appointed as the head of the CFPB. The Administration has said that it will abide by its June 22 deadline to appoint a permanent head of the CFPB. Acting Chairman Mick Mulvaney is not involved in the selection process. Mark McWatters, a former banking regulator is another top choice, and probably makes more sense than Issa.

The May real estate market was the strongest on record, according to Redfin. Prices rose 6.3% and the average home was on market 34 days. In Denver, the time on market was under a week. Over a quarter of the homes sold in May went over their listing price. San Jose saw a price increase of 27% YOY to a median home price of over $1.2 million.

Note that rents rose by 3.6%, which is tilting the rent-vs-buy decision a little. Interestingly, Sam Zell, a famous real estate financier, thinks the multifam market is topping and should become less attractive going forward.

Affordable home advocates are touting a statistic that shows a minimum wage worker cannot afford a 2 bedroom apartment anywhere in the country. That is an awfully high bar – heck entry level investment bankers can’t afford a 2 bedroom apartment either. That is why young adults usually have roommates. I get there is a shortage of affordable housing, but that is a completely disingenuous statistic. Sam Zell is probably correct, however there could in fact be a glut of luxury apartments and a shortage of affordable ones.

Author: Brent Nyitray

Why do you need new bands? Everyone knows rock attained perfection in 1974. It's a scientific fact. - Homer Simpson

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