Morning Report: Fed will almost assuredly hike this week 3/13/17

Vital Statistics:

Last Change
S&P Futures 2372.0 1.0
Eurostoxx Index 374.3 1.1
Oil (WTI) 48.3 -0.2
US dollar index 91.7  
10 Year Govt Bond Yield 2.59%
Current Coupon Fannie Mae TBA 101.03
Current Coupon Ginnie Mae TBA 102.5
30 Year Fixed Rate Mortgage 4.21

Stocks are flat this morning on no real news. Bonds and MBS are up.

We will be getting a lot of important economic data this week, with housing starts, inflation, and retail sales. That said, the biggest event this week will be the FOMC meeting on Tuesday and Wednesday. A major snowstorm is expected to hit the East Coast on Tuesday, so that could affect things, especially if the government tells all non-essential government employees to stay home on Tuesday. DC is expected to get 6 – 10 inches, while the Northeast could get up to 2 feet.

The era of easy money is supposedly over at the Fed, although even if the Fed hikes 3x this year, monetary policy will still be extraordinarily accommodative. With its giant balance sheet and still negative short term rates, it will take a long time to get to neutrality. Not only that, the Fed is going much slower than it has in the past. You can compare the different cycles in the chart below. Another big break from the past was communication: Over the past month, Fed governors have been singing from the same sheet of music and preparing the markets for hikes. This time around, the markets believe the Fed will actually hike rates; in 2016 the markets called the Fed’s bluff.

tightening cycles 2

FWIW, Goldman is saying it will be a close call between 4 hikes this year and 3 hikes plus a balance sheet adjustment. The Fed Funds futures are now 90% on a hike this week. The big question is how much of this is the Fed getting ahead of expected expansionary fiscal policies which may or may not happen.

Here is a good cheat sheet of how various asset classes have performed during Fed tightening cycles. Cash outperforms bonds, but stocks outperform both. Who says you can’t fight the Fed?

hiking cycles

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