Morning Report: James Bullard sees unemployment falling below 3%.

Vital Statistics:

 LastChange
S&P futures4,377-29.25
Oil (WTI)105.31-2.59
10 year government bond yield 2.92%
30 year fixed rate mortgage 5.27%

Stocks are lower this morning as bond yields continue to rise. Bonds and MBS are down.

St. Louis Fed President James Bullard made some hawkish comments yesterday, saying he would like to see the Fed Funds rate at 3.5% by the end of the year. He also said that unemployment should fall below 3% (!). “What we need to do right now is get expeditiously to neutral and then go from there.” Given that inflation rates are much higher than interest rates, monetary policy is still incredibly loose. Real (i.e. inflation-adjusted) interest rates are highly negative.

The last time the unemployment rate was below 3% was in the early 1950s.

Where were interest rates during the early 1950s? The 3 month T-bill was between 1.5% and 2% for the most part, and high quality corporate debt was yielding about 3%. The inflation rate in 1952 was 1.92%. So real interest rates were about 0%, give or take.

Housing starts came in at a seasonally-adjusted annual rate of 1.79 million in March, which was higher than expected. This is up 4% on a YOY basis. Building Permits rose to a 1.87 million pace.

Despite the increase in housing starts, homebuilder confidence continues to sag. The NAHB / Wells Fargo Housing Market Index, which measures homebuilder sentiment fell for the fourth month in a row. “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said NAHB Chief Economist Robert Dietz. Interestingly, the Northeast (which has been the laggard in the US housing market over the past 15 years) rose while everywhere else fell.

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