Vital Statistics:
| Last | Change | |
| S&P futures | 3,699 | -94.25 |
| Oil (WTI) | 113.21 | -2.64 |
| 10 year government bond yield | 3.43% | |
| 30 year fixed rate mortgage | 6.03% |
Stocks are lower this morning as markets digest the Fed’s move yesterday. Bonds and MBS are down.
The Fed raised the Fed Funds rate 75 basis points yesterday. This was the biggest increase since 1994. We got a new set of projections as well, with the Fed raising its inflation and unemployment forecasts and cutting GDP growth forecasts. The dot plot moved upward pretty dramatically. You can see the June versus March plots below:
The central tendency in March was for a Fed Funds rate between 1.75% and 2% by the end of the year. That forecast is now 3.25% – 3.5%. The forecast for 2022 GDP was lowered from 2.8% to 1.7%, while the forecast for unemployment was moved up from 3.5% to 3.7% and the forecast for inflation was increased to 5.2% from 4.3%. The core inflation forecast (ex-food and energy) was bumped up slightly from 4,1% to 4.3%.
Jerome Powell said the central bank focused a lot on the University of Michigan sentiment index, especially the part about inflationary expectations. The median expectation for inflation was 5.4%, but the mean was 7.4%. That is a big concern for the Fed. The fear is that we get a wage-price spiral, where prices rise, workers demand higher compensation, which increases prices and drives further inflation. The big question concerns whether the Fed is chasing oil prices. Since the Fed has no control over commodity prices, it really should focus on core inflation. That said, its mandate is to manage headline inflation, so it may be forced to overreact to rising food and energy prices.
With the Atlanta Fed predicting 0% GDP growth this quarter, and the lousy retail sales print yesterday, we might already be in a recession. And if we are, we might be getting to the point where bad economic news is considered good news since investors will assume economic weakness will take the top off inflation and allow the Fed to take a breather on rate hikes. The minutes to the June meeting will be interesting to read.
So far, the yield curve has steepened in response to the meeting, with 2s / 10s trading at 14 basis points. Corporate credit spreads are behaving as well, so we aren’t seeing indications that economic weakness is spilling over into the financial sector, at least not yet.
Housing starts disappointed again, as rising home prices, mortgage rates, and materials prices make new houses expensive. Starts fell 14% MOM and 4% YOY to a seasonally-adjusted annualized pace of 1.55 million. Building Permits came in flat YOY at 1.7 million.
The NAHB / Wells Fargo Housing Market Index (which measures builder sentiment) fell to the lowest level since June of 2020. This is the sixth consecutive monthly decline. Building materials costs are up 19% YOY, except for lumber.
Housing remains a weak part of the economy, however it usually leads the economy out of a recession. If we get some relief on inflation and rising interest rates, perhaps the housing sector will get some legs later this year or next.
The Daily Tearsheet 