Morning Report: Fed week

Vital Statistics:

 LastChange
S&P futures4,20614.2
Oil (WTI)104.90-4.59
10 year government bond yield 2.08%
30 year fixed rate mortgage 4.28%

Stocks are higher this morning as Russia and Ukraine begin talks. Bonds and MBS are down.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. The markets expect the Fed to hike the Fed Funds rate by 25 basis points, and to announce that they have ended their Treasury and MBS purchase program, but will still reinvest the proceeds from maturing bonds back into the market.

A lot of the attention will focus on the dot plot and revisions to the economic forecast, particularly the core PCE which is the Fed’s preferred measure of inflation. In December, the Fed was forecasting 2.6% headline PCE inflation and 2.7% core (i.e ex-food and energy) inflation. While the Consumer Price Index (CPI) and PCE are not constructed exactly alike, they are similar enough. And last week, we saw a 7.9% increase in the headline CPI and 6.4% increase on the index less food and energy. And before someone says “Putin” these are February numbers, which precede the invasion. So, the inflation estimates are going up.

The dot plot from December shows the Fed expects about 3 rate hikes this year:

The Fed funds futures see another 4 hikes.

How those two things reconcile will be a big indicator in how the bond market behaves. Note the Fed was predicting a 4% increase in GDP this year in December. Stock market investors will be watching that forecast.

Aside from the Fed, we will get the Producer Price Index on Tuesday, retail sales on Wednesday, housing starts on Thursday and LEI on Friday. So we are in for a heavy week of data.

Housing inventory remains exceptionally low, according to Zillow. It estimates that US inventory fell to 729,000 homes in February. The big drivers of this have been the lack of homebuilding we have seen since the real estate bubble burst, and rising mortgage rates. With rates increasing, many homeowners who considered buying a move-up property are staying put, and many older Americans are aging in place.

Author: Brent Nyitray

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

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