Morning Report: The Fed acknowledges risks to the global economy 1/28/16

Markets are flattish after the Fed maintained interest rate levels. Bonds and MBS are flat.

The statement out of the FOMC was relatively dovish, and the key sentence was: “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Stocks initially rallied on the statement and then sold off into the close. Bonds rallied.

Initial Jobless Claims fell from 294k to 278k last week.

Durable Goods orders fell by 5.1%, much more than the Street expectation of -0.7%. Capital Goods orders ex defense / air, a proxy for business capital expenditures, fell 4.3%.

Pending Home Sales rose 0.1% in December and are up 3.1% YOY.

The Kansas City Fed index was unchanged at -9.

Homebuilder PulteGroup reported better than expected earnings this morning. Orders were up 13%, and backlog increased 26%. ASPs increased 6% to $353k. CEO Richard Dugas had this to say about the state of the housing market: “While heightened global economic concerns have created greater market volatility, the positive trends in jobs, demographics and household formations, along with low interest rates and limited housing inventory, support expectations that housing demand continues to move higher at a measured pace for a number of years.” They are seeing weakness in Texas, although Dallas seems to be immune to the drop in energy prices, at least for now.

The CBO estimates that wage growth will outstrip home price appreciation in 2016. They are predicting 3.3% wage inflation and 2.4% home price appreciation. Given the tight inventory levels, I think that home price appreciation estimate is low. Wage inflation has recently crept up from 2% to 2.5%, but I don’t see the catalyst for further wage inflation given the huge reservoir of people who left the labor force for statistical purposes but would gladly take a job if they found one.

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