Stocks are lower this morning as the Iranian situation continues to drag on. Bonds and MBS are down.
The US will guide stranded ships through the Strait of Hormuz. “Countries from all over the World…have asked the United States if we could help free up their Ships, which are locked up in the Strait of Hormuz,” Trump wrote on Truth Social on Sunday. “For the good of Iran, the Middle East, and the United States, we have told these Countries that we will guide their Ships safely out of these restricted Waterways, so that they can freely and ably get on with their business.”
The week ahead will be dominated by the jobs report on Friday. We will also get new home sales, ISM Services, construction spending and consumer sentiment. We will get earnings from PennyMac, Zillow, Blue Owl Technology and United Wholesale.
The manufacturing economy continued to expand in April according to the ISM Manufacturing Report. New orders rebounded after four months of contraction, while production decreased. Prices jumped again, with the prices index at the highest levels since 2022 when inflation was peaking. “In April, U.S. manufacturing activity remained in expansion territory, growing at the same pace as the month before. Of the five subindexes that make up the PMI®, the New Orders and Supplier Deliveries indexes indicated faster growth compared to the previous month, the Production Index grew at a slower rate, and the Employment and Inventories indexes remained in contraction.
“In this second month of the Iran War (at the time of data collection), 31 percent of the comments were positive and 69 percent negative, with a positive to negative sentiment ratio of 1 to 2.2. Among comments, the war was mentioned in 47 percent and tariffs in 18 percent. As was the case last month, some panelists referenced both topics within a single comment or in mixed sentiment.
In the FOMC decision last week, Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time. The dissent was interesting because there wasn’t any clear language in the statement that talked about an easing bias in the first place. It seemed the Fed was looking at both sides of the dual mandate.
Neel Kashkari explained his dissent here. “I supported the Federal Open Market Committee’s (FOMC) decision to hold the federal funds rate at this week’s meeting,1 but I dissented against the FOMC’s action because I did not think it was appropriate to continue to include the following phrase in the policy statement: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate …”
While that phrase is not a commitment to make further cuts to the policy rate, it is widely interpreted by Fed watchers to indicate the Committee’s expectation that the next adjustment to the federal funds rate would be a cut. I consider this language a form of forward guidance about the likely direction for monetary policy.”
The bias of the Fed had been towards easing in the past, simply because the Fed Funds rate was above the neutral rate of interest and inflation was falling. I don’t think the statement itself was driving it – the facts on the ground were. That said, I think Neel wanted a brushback pitch to the markets not to assume that rates are going to be falling in the future, and this was a way to do that.
He wraps up the piece with this: “Given the uncertainty about the path of the conflict and the resulting effects on inflation, employment and economic growth, I believe the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves. This could tighten financial conditions somewhat today, pushing back against a high-inflation scenario that could require an even stronger monetary policy response in the future.”
