Morning Report: The markets are beginning to handicap rate hikes

Vital Statistics:

S&P futures3861-12.3
Oil (WTI)62.390.74
10 year government bond yield 1.43%
30 year fixed rate mortgage 3.09%

Stocks are lower this morning as Jerome Powell continues his Humphrey-Hawkins testimony. Bonds are still getting slammed.

Jerome Powell said that the Fed will be accommodative for the foreseeable future. “Monetary policy is accommodative and it continues to need to be accommodative … Expect us to move carefully, patiently, and with a lot of advance warning before any changes.” In other words, he said the same stuff he has been saying.

The problem is that the markets aren’t buying it. The yield on the 10 year bond continues to accelerate to the upside, and the Fed Funds futures were pricing in a 10% chance of a hike at the April meeting at one point yesterday. They were pricing in a 15% chance of a hike by the December meeting. This is after predicting no changes through 2023. Note the market is handicapping a non-zero chance of 50 bps by December.

The markets are a forward-looking mechanism, and if you want to get an idea of how they are seeing the future, take a look at the S&P 500 retail ETF, which has almost doubled over the past year, despite all of the retail closures in 2020. Not only that, it is double where it has traded pre-COVID. This is a huge bet on an economic recovery. Not sure I agree with this conclusion, but the market is betting that stimulus dollars are going to be spent, not saved. The only way this happens is if you see a massive increase in hiring, along with an acceleration in wage growth.

The increase in rates has taken a bite out of mortgage applications. The MBA reported that applications fell 11.4% last week as purchases fell 11% and refis fell 12%. The Texas ice storm was partially responsible. “Mortgage rates have increased in six of the last eight weeks, with the benchmark 30-year fixed rate last week climbing above 3 percent to its highest level since September 2020,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Additionally, the severe winter weather in Texas affected many households and lenders, causing more than a 40 percent drop in both purchase and refinance applications in the state last week.”

New home sales rose 4% MOM and 19% YOY, according to the Census Bureau. There are 307,000 new homes for sale, which represents about a four month supply at the current sales pace.

New York City’s harsh rules on foreclosures and squatters is sending the City back to the days of the 1970s and 1980s. Note the bubbly Millennial Marxist who is completely sanguine on how this affects landlords. This is certainly not going to be good for apartment prices in the City. Note that things are just as bad in Seattle, with a deluge of new apartment construction colliding with a collapse in demand. I guess the cities are going to have to re-learn the lessons of 40 years ago.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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