Morning Report: Dovish FOMC minutes

Vital Statistics:

 LastChange
S&P futures4,08010.4
Oil (WTI)59.17-0.65
10 year government bond yield 1.66%
30 year fixed rate mortgage 3.28%

Stocks are higher this morning despite another disappointing unemployment filing number. Bonds and MBS are up.

Initial Jobless Claims increased to 744,000 last week. Despite the improvement in the BLS Employment Situation report, this drip, drip, drip of initial claims is worrisome.

The FOMC minutes were pretty dovish. I was interested in what drove the significant upward revision in GDP forecasts, and they primarily based it on vaccination progress, in addition to some economic reports. The stimulus measures were mentioned as well, but essentially the optimism in the economy is based on the progress made in battling COVID.

“Participants observed that the pace of the economic recovery had picked up recently and that the economy continued to show resilience in the face of the pandemic. They noted encouraging developments regarding the pandemic, including significant declines in the number of new cases, hospitalizations, and deaths over the intermeeting period as well as a pickup in the pace of vaccinations. In light of these developments as well as the extent of the recent fiscal policy support, participants significantly revised up their projections for real GDP growth this year compared with the projections they submitted last December. They noted, however, that economic activity and employment were currently well below levels consistent with maximum employment.”

In terms of consumer spending, the Fed noted that consumption had risen this year, however spending on services has been weak. They mentioned the high consumer savings rate and expect that this represents pent-up demand that will be released later in the year as social distancing restrictions are removed.

They noted that the labor market improved recently, however there is a lot of work to do in order to get back to normalcy.

“Participants observed that labor market conditions had improved recently, as payroll employment registered strong gains in February and the unemployment rate fell to 6.2 percent. Even so, payroll employment was about 9.5 million jobs below its pre-pandemic level, and labor market conditions for those in the most disadvantaged communities were viewed as lagging behind those of other households. Moreover, participants noted that employment in the leisure and hospitality sector was still down substantially from its pre-pandemic level despite a sharp rebound in February. Participants generally expected strong job gains to continue over coming months and into the medium term, supported by accommodative fiscal and monetary policies as well as by continued progress on vaccinations, further reopening of sectors most affected by the pandemic, and the associated recovery in economic activity. However, participants noted that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment.”

Finally, they discussed the increased inflation numbers. It turns out that the 2%+ PCE inflation forecast for the rest of the year is being driven primarily by exceptionally weak inflation numbers in the spring and summer of 2020. As things return to normalcy, the year-over-year comparisons will be exaggerated. In other words, a 2.3% or 2.4% PCE reading should be nothing for the bond market to freak out over.

Overall, the minutes were interpreted as dovish, particularly the sentence that the economy was “far from” achieving the goal of maximum employment.

The MBA’s Mortgage Credit Availability Index improved last month, driven by improvement in low FICO and high LTV products. I wonder if this was driven by the announcement by the GSEs that they will begin limiting these products and bankers are trying to get these loans done before the window closes. We are still way below where we were pre-COVID, however.

The Biden Administration is planning to help ease the housing shortage by providing incentives to local governments to permit apartment buildings in areas zoned for single-family residences only. Essentially, if local governments ease zoning restrictions, they will get grants from the Federal government for building schools, etc. This is being trumpeted by the Administration as “all carrot, no stick” however that doesn’t mean that HUD won’t be back suing local governments under the AFFH argument. Ultimately this comes down to how much the local governments need the money.

Speaking of the Biden Admin, he is “willing to negotiate” on the higher corporate tax rate. It sounds like he is getting some push-back from people in his own party on this.

10 Responses

  1. Worth a watch:

    It will be amusing if you end up having to have a COVID passport to vote but not a photo ID.

    Liked by 1 person

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