Morning Report: Fed hikes, but is a credibility problem brewing? 6/15/17

Vital Statistics:

Last Change
S&P Futures 2420.0 -15.3
Eurostoxx Index 384.3 -3.3
Oil (WTI) 44.6 -0.2
US dollar index 88.6 0.5
10 Year Govt Bond Yield 2.16%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 3.95

Stocks are lower this morning after the FOMC raised rates yesterday. Bonds and MBS are down after rallying yesterday.

As expected, the FOMC raised the Fed Funds rate by 25 basis points and continued its policy of re-investing maturing bonds from QE back into the market. Neel Kashkari dissented, preferring to maintain the current Fed Funds rate. The dot plot basically did not change meaningfully from March to January. The projections did change, as the unemployment forecast for 2018 and 2019 was revised downward from 4.5% to 4.2%. Bonds reacted negatively to the move, but that was colored by the fact that bond yields were already down 10 basis points on the day due to the weaker than expected CPI and consumer spending numbers. The highlighted areas on the projection below show the major changes.

FOMC projections - June 2017

The Fed Funds futures are predicting a less than 15% chance of a rate hike in September, however. In fact, the Fed funds futures are handicapping a 50% chance of no more rate hikes this year.

Fed Funds probability CME

Compare the Fed Funds futures implied probability to the latest dot plot. The labels on the side show what each forecast is.

dot plot June 2017

Note that 14 out of the 17 FOMC members think the Fed is going to hike at least another 25 basis points this year. In fact, 4 out of 17 think that will be the case, while the market gives it about a 6% chance. There is a big disconnect happening between what the Fed is saying it will do and what the market thinks they will do. Not necessarily saying the Fed has a credibility problem, but the markets and the FOMC don’t seem to be on the same page.

In other economic data, initial jobless claims fell to 237k last week, which is more evidence that the labor market is strengthening into the summer months. The Philly Fed report showed continued strength in manufacturing, while the Empire State Manufacturing Survey picked up strength as well.

Industrial production was flat in May after a big upwardly-revised jump in April. Manufacturing production slipped 0.4%, while capacity utilization ticked down 0.1%. Big picture: April was a huge jump in all indices and May gave back a little.

The NAHB Housing Market Index slipped a little in May, but builder sentiment is still buoyant.

Wells is being sued for allegedly changing the terms of loans for customers in bankruptcy. They lowered the payments, but extended the term without the borrower’s knowledge, nor Court approval, the suit alleges. The stock is down slightly pre-open, more or less in line with the market.

One Response

  1. Good read.

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