Morning Report: Jerome Powell gets more hawkish

Vital Statistics:

 LastChange
S&P futures4,46716.2
Oil (WTI)112.824.39
10 year government bond yield 2.36%
30 year fixed rate mortgage 4.60%

Stocks are higher this morning after Fed Chairman Jerome Powell said the Fed was prepared to move in half point increments to beat inflation. Bonds and MBS are down.

Goldman is out with a call saying that the Fed will raise the Fed Funds rate by 50 basis points at both the May and June meetings. They are basing this on the change in language from Powell last night, where he said the Fed must move “expeditiously” and “more aggressively” to prevent an upward spiral from occurring. Overall, Goldman is forecasting 50 bps in May and June, and then 25 bps at every meeting for the rest of 2022 and the first 3 meetings in 2023.

It is interesting to see stocks rallying on Powell’s comments. The general playbook is that stocks generally struggle when the Fed is tightening. At a panel last night, Powell said: “If we think it’s appropriate to raise [by a half point] at a meeting or meetings, we will do so,” Mr. Powell said during a moderated discussion after a speech on Monday before the National Association for Business Economics in Washington, D.C. He acknowledged that inflation is no longer “transitory:” “That story has already fallen apart,” Mr. Powell said Monday. “To the extent it continues to fall apart, my colleagues and I may well reach the conclusion we’ll need to move more quickly. And if so, we’ll do so.”

If the Fed follows Goldman’s forecast, the Fed Funds rate will be be in a range of 2.25% – 2.5% by the end of the year. This is more or less where rates were in 2019 before the pandemic. The bond market bottomed in late 1980, when the Fed Funds rate topped out at 22%. While stock bull markets generally last a few years, and bear markets last under a year, bond market cycles are long.

The number of loans in forbearance slipped by 12 basis points to 1.18% of servicer’s portfolios in February. “There were many positive results in overall mortgage performance in February,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “The percentage of borrowers in forbearance declined for the 21st consecutive month, and the percentage of borrowers current on their mortgage payments increased to almost 95 percent – 350 basis points higher than one year ago. Finally, the percentage of borrowers with existing loan workouts who were current on their mortgage payments improved for the first time since June 2021. These three results – the lower forbearance rates and higher performance rates for both total borrowers and borrowers in workouts – are especially favorable, given that there is typically a dip in mortgage performance in February because of the shortened number of days to make a payment.” 

Author: Brent Nyitray

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

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