Morning Report: The Fed hikes rates 25 basis points as expected 3/22/18

Vital Statistics:

Last Change
S&P futures 2699 -19
Eurostoxx index 371.42 -3.54
Oil (WTI) 63.42 1.36
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.46%

Stocks are lower this morning after the Fed hiked rates and the Bank of England decided to stand pat. Bonds and MBS are up.

In a unanimous decision, the FOMC hiked the Fed Funds rate 25 basis points yesterday and released its new dot plot and projections. The projection materials showed a meaningful hike in projected GDP: from 2.5% to 2.7% in 2018 and from 2.1% to 2.4% in 2019. They also took down their estimate for unemployment: from 3.9% to 3.8% in 2018 and from 3.9% to 3.6% in 2019. They also cut their long term estimate of the unemployment rate from 4.6% to 4.5%. The dot plot bumped up their projections for the Fed funds rate across the board, by about a quarter in 2018 and 2019 and by 3/8 in 2020. The Fed funds futures didn’t move much. The May futures are predicting no change, the June futures are predicting a 78% chance of another 25 basis point hike, and the Dec futures are predicting a 42% chance of another 25 basis point hike.

Note the dot plot comparison and how the interest rate forecasts inched up: Bill Gross isn’t buying the forecast. He thinks a Fed Funds rate above 2% when inflation is only 2% will be too destabilizing in such a highly leveraged world. Of course Bill is probably talking his book a bit too.

Home prices rose 0.8% MOM and 7.3% YOY according to the FHFA House Price Index. The Middle Atlantic and Midwest lagged while the West Coast and Mountain states led.

Initial Jobless Claims ticked up 3k last week to 229,000.

The Index of Leading Economic Indicators came in much stronger than expected in February. January was revised upward as well.

The Trump administration plans to announce $50 billion in tariffs against the Chinese for intellectual property violations. The US accuses China of using foreign investment restrictions to force US companies to share technology.

Fannie and Fred are stepping up their purchases of affordable housing loans under their “duty to serve” mandate. Between them, they will buy roughly 8,400 more loans for manufactured, rural, and affordable housing. The problem with these areas (especially rural areas) is that the low loan balances make the loans themselves less profitable. On the other hand, low balance loans generally have higher servicing values, all things being equal. The GSEs are targeting Appalacia, the lower Mississippi Delta, and Native American areas.

Loan gestation times fell to 42 days in February, according to the latest Ellie Mae Origination Insights Report. This is a big drop on a year-over-year basis as well, which strips out some of the seasonality issues. Credit scores also fell a touch.

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