Morning Report: Dovish comments out of Jerome Powell

Vital Statistics:

S&P futures3921-9.4
Oil (WTI)59.02-2.42
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.34%

Stocks are lower this morning as Jerome Powell heads to the Hill for two days of testimony. Bonds and MBS are up.

Bond yields are falling a little on Jerome Powell’s prepared remarks. While he talked about the recovery, he did mention the further work to be done.

Indicators of economic activity and employment have turned up recently. Household spending on goods has risen notably so far this year, although spending on services remains low, especially in sectors that typically require in-person gatherings. The housing sector has more than fully recovered from the downturn, while business investment and manufacturing production have also picked up. As with overall economic activity, conditions in the labor market have recently improved. Employment rose by 379,000 in February, as the leisure and hospitality sector recouped about two-thirds of the jobs it lost in December and January. The recovery has progressed more quickly than generally expected and looks to be strengthening. This is due in significant part to the unprecedented fiscal and monetary policy actions I mentioned, which provided essential support to households, businesses, and communities. However, the sectors of the economy most adversely affected by the resurgence of the virus, and by greater social distancing, remain weak, and the unemployment rate—still elevated at 6.2 percent—underestimates the shortfall, particularly as labor market participation remains notably below pre-pandemic levels. We welcome this progress, but will not lose sight of the millions of Americans who are still hurting, including lower-wage workers in the services sector, African Americans, Hispanics, and other minority groups that have been especially hard hit.

The Biden Administration is working on a $3 trillion infrastructure plan which will include roads and bridges, updating the electrical grid, universal broadband, and tax increases. I don’t think any Republican has voted for a tax increase since the George HW Bush “Read My Lips” moment, so hopes of bipartisanship are probably not going to happen. Regardless, Biden is going to try.

The number of loans in forbearance fell to 5.05%, according to the MBA. “New forbearance requests decreased to their lowest level since last March. Combined with a steady pace of exits, this drop in new requests resulted in a larger decline in the share of loans in forbearance across all investor categories,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “More than 11 percent of borrowers in forbearance have now exceeded the 12-month mark. We anticipate that servicers will be busy over the next month, with many homeowners opting for the extension for up to 18 months recently made available for federally-backed loans.”  

Speaking of the MBA, it had issued a letter that urged the government to reconsider the investment caps for Fannie and Freddie. That letter is no longer on the MBA’s website. Could be wishful thinking on my part, but maybe the government is re-thinking this directive? Janet Yellen could write a letter to FHFA rescinding the last letter, and it would be business as usual. I think the last thing the government wants to see is credit get restricted.

New Home Sales fell 18% to a seasonally-adjusted annual rate of 775,000. This is 18.2% below January, but 8% above last February. I suspect this is weather-driven, but higher input prices are having an effect as well.

Dallas Fed Head Robert Kaplan said he was one of the members who would vote for a rate hike in 2022.

The forecast has improved, my forecast has improved meaningfully,” said Kaplan, adding that he is expecting 6.5% growth in gross domestic product in 2021, in line with the median committee estimate. Having said that, we’re still in the middle of the pandemic, and I want to see more than a forecast. I want to see actual evidence that that forecast is going to unfold. As we do, and as we make substantial further progress in meeting our dual mandate goals, I for one am going to be an advocate of beginning the process of moving some of these extraordinary monetary measures and doing it sooner rather than later,” he said. “But I need to see outcomes, not just a strong forecast.

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