Morning Report: The Fed hikes rates

Vital Statistics:

 LastChange
S&P futures4,257-37.25
Oil (WTI)110.512.69
10 year government bond yield 3.00%
30 year fixed rate mortgage 5.52%

Stocks are lower this morning after the Fed hiked interest rates. Bonds and MBS are down.

The Fed raised interest rates 50 basis point yesterday and laid out the parameters of balance sheet reduction. Starting June 1, the Fed will start letting $17.5 billion in mortgage backed securities and $30 billion in Treasuries mature per month. Any maturing bonds in excess of those amounts will be re-invested back in the market. After 3 months, those ceilings will double to $35 billion in MBS and $60 billion in Treasuries.

The last time the Fed tried to shrink its balance sheet, it caused havoc in the repo market. This was because hedge funds were borrowing heavily in the repo market to fund basis trades (similar to what Long Term Capital Management was doing back in the day). They were exploiting minute mispricings in the Treasury market and leveraging heavily to make it worth their while. All of this blew up when repo rates (which was their cost of borrowing) spiked which threatened the stability of the financial system. The Fed ended up extending emergency loans and ended its experiment in balance sheet reduction. So, just be aware that letting some of these things just run off isn’t necessarily as easy as it sounds.

During the press conference, Jerome Powell said that a 75 basis point hike was not being “actively considered.” The bond market rallied a bit on the news, with the 10 year Treasury yield dropping to about 2.9%. This morning we are back at yesterday’s pre-meeting levels. TBA spreads have been extraordinarily wide for the past couple of weeks, with some coupons experiencing a half point bid / ask spread. It looks like bid / ask spreads are narrower this morning (but still wide compared to historical norms). The MBS market still seems somewhat jumpy despite the guidance the Fed put out yesterday.

Powell’s dismissal of a 75 basis point hike caused the June Fed Funds futures to become markedly more dovish. A week ago, the market consensus was that the Fed Funds rate would be in a 150-175 basis point range. Now, it is looking like the market is handicapping only a 25 basis point increase.

Black Knight is being bought by the Intercontinental Exchange, which owns Optimal Blue, MERS and Ellie Mae. “Since our founding in 2000, ICE’s simple mission has been to make analog and opaque financial transactions more digital and transparent, beginning with commodity markets, extending across a large array of asset classes, and most recently working to help streamline the mortgage industry,” said Jeffrey C. Sprecher, Founder, Chair and CEO of Intercontinental Exchange. “Black Knight shares our passion for leveraging technology to serve customers and households, and, with our expertise in operating networks and marketplaces, our planned acquisition will bring to life a true end-to-end solution for the mortgage manufacturing and servicing ecosystem, benefitting aspiring and current homeowners across the United States.”

I suspect that the Hart Scott Rodino antitrust review will not be a slam dunk, since it would combine loan origination systems Encompass and Empower. I think the LOS market is pretty concentrated and these two are on the bigger side when it comes to market share.

Since ICE also owns the New York Stock Exchange as well as other derivatives exchanges I could see them developing Resitrader into a whole loan trading ecosystem.

Initial Jobless claims rose to 200,000 last week, which was a touch above expectations. That said, 200,000 is extremely low in terms of historical standards. Separately outplacement firm Challenger, Gray and Christmas said that there announced job cuts rose to 24,286 last month.

Productivity collapsed in the first quarter of 2022. Nonfarm productivity fell 7.5%, which was the biggest drop since 1947. Unit labor costs increased a whopping 11.6%. This was driven by a 3.2% increase in compensation and and the decrease in productivity. Since productivity is ultimately the biggest driver of standards of living, this is worrisome. Keep in mind that this is only the first reading for the quarter so it will be revised.

Over the past four quarter, unit labor costs have increased 7.2%, which is the largest increase since 1982. I am not sure whether this troubles the Fed or not. Labor has lagged capital for so long that they might be ok with this. Of course it does indicate that the wage-price spiral is back after a long slumber.

27 Responses

  1. The powers that be are going all in to attack Elon Musk:

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  2. Haven’t really followed the Elon Musk stuff, now that he’s in Texas and owns Twitter. I gave up on all social media years ago so it’s uninteresting to me what he’s doing with Twitter. I do like the idea of electric cars………….we have one and love it. Our Oil Industry girl just bought a new one too so we’re into electric cars, solar panels and wind turbines.

    RE the issue of the SC leak……………I know there was a lot of discussion on that previous thread but it was tough to follow and respond to because I was on my phone and I know I missed a lot of questions and comments. I do think the leak is less important than what will probably be the overturn of Roe!

    All I can say is that while I’m not every Woman, or any Woman really, my point is that many or some women (defined as females of child bearing capabilities or age, and their loved ones who care about them) may not appreciate the end of Roe. It looks like between 60 and 65% of Americans support ROE. So my original point was very simply, that R’s/Conservatives may have an issue they didn’t anticipate debating in the mid-terms.

    I was teasing about being the Dumb Blonde but I appreciate Kevin’s comment…..LOL

    And I obviously know what I’m getting into here by commenting at all…………..feel a little like the sacrificial lamb but who doesn’t love lambs???? Right?

    I’m a little scattered and stressed right now because of Walter’s health and an upcoming surgery but I know that’s not an excuse not to respond to some of your questions……………but you seriously overwhelmed me when I showed back up. I’m not asking you to take it easy on me……………but if you’re interested at all about me sticking around……………..give me a chance to breathe and respond without being overwhelmed. Or not…………up to you guys!

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    • lms:

      my point is that many or some women (defined as females of child bearing capabilities or age, and their loved ones who care about them)

      Well, I am a loved one who cares about the 4 females of child bearing age in my family, so I guess that makes me a woman 4 times over! Awesome!!! Maybe I can have a legitimate opinion on abortion now?

      It looks like between 60 and 65% of Americans support ROE.

      It is true that that is what polls show, but polls also show that most people have literally no idea what Roe even says, so I would take that with a grain of salt. When politicians who want to codify the Roe regime actually have to run on having legalized the killing of babies in the 9th month of pregnancy, I suspect many will find that support for it isn’t quite what the pro-abortion lobby has been selling them. At least outside of the radical left confines of place like California and New York.

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      • Scott, you can have whatever opinion you want on abortion. I’m not holding you back from that………….truly. I’m actually not a fan myself but I do think there is a choice here that should/could be made by families and not dictated by the SCor state legislatures. After all the SC judges pretty much agreed that Roe was established precedent according to the questions they answered in their confirmations. I’m not a lawyer so not sure I understand the implications of how this will affect following judgements re Roe………..I simply think this is, or should be, a decision between partners and families. I do agree there should be some restrictions but not sure where that line should be drawn.

        I really don’t know anyone who supports killing babies in the 9th month and if they do………….I obviously wouldn’t support them. Do you actually know of someone in CA who supports that? If you do, let me know and I will campaign against them to the best of my ability.

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        • I’d bet money Gavin Newsome does not support any limits on abortion, up to and including a crowning infant.

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        • Gavin Newsome would support murdering 3rd graders if it supported his political power.

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        • McWing……………I seriously doubt that is correct but I’ll look into it. I really don’t know anyone IRL who would support that kind of abortion. Not sure where you guys get your info, but if you can confirm anything like that………….I’d like to see the proof.

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        • lms:

          I seriously doubt that is correct but I’ll look into it.

          California law currently allows late term abortions in order to protect the mother’s life or health, where “health” is defined to include mental/emotional health. All a women needs to do is to find an abortionist willing to agree that her mental health is at risk from having the baby, and she can legally abort it, right up until the day it is born.

          This is in fact perfectly in line with SCOTUS’s Roe regime. Although Roe purported to allow states to restrict access to abortion starting in the second trimester, Roe’s sister case decided on the same day, Doe v Bolton, ruled that any such restricted access had to provide an exception to protect the life and health of the mother, where the “health” risk was to be determined at the sole discretion of the acting physician, and was to be based on factors including “physical, emotional, psychological, familial, and the woman’s age–relevant to the wellbeing of the patient.” Given this wide ranging definition of “health” and the broad discretion given to an abortionist as a result, all a woman really needs in order to get a 9th month abortion is to find an abortionist willing to provide her with one. Thus, the Doe ruling essentially eviscerated the power of states to restrict access to 2nd and 3rd trimester abortions that Roe had ostensibly allowed.

          Now, in fact many states (CA is not one) are actually in violation of the Doe ruling, given that their laws explicitly allow for late term abortions only to protect the mother’s life, and in some cases her physical health, but not her mental health. But the abortion lobby has been reticent to challenge these laws, presumably in order to avoid bringing attention to just how radical and extreme the Roe regime actually is, lest it generate popular opposition once people know what Roe actually does.

          BTW, you seem unaware, but just last month the CA assembly passed a new law, AB2223, that many people are interpreting to be effectively legalising infanticide. The bill essentially exempts anyone from any criminal or civil liability “based on their actions or omissions with respect to their pregnancy or actual, potential, or alleged pregnancy outcome, including miscarriage, stillbirth, or abortion, or perinatal death due to a pregnancy-related cause.” The inclusion of “perinatal death” would, based on the definition of the term, include not just the entire period of pregnancy, but also at least some period of time post-birth.

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        • lms:

          I really don’t know anyone IRL who would support that kind of abortion.

          Here are just a few of the many Dem politicians who explicitly say they do.

          https://thefederalist.com/2022/05/05/democrats-dont-just-want-to-keep-roe-they-want-the-unlimited-ability-to-kill-preborn-babies/

          In fact, I think it may be easier to find D politicians who will say outright that they do not want any restrictions at all than it is to find D’s who will openly proclaim their opposition to abortion post 12 or 15 weeks.

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        • lms:

          More…

          HR 3755, the euphemistically named “Women’s Health Protection Act of 2021”, would establish a federal statutory right of abortion providers to provide a post-viability abortion “when, in the good-faith medical judgement of the treating health care provider, continuation of the pregnancy would pose a risk to the pregnant patient’s life or health”.

          The term “health” is conspicuously not defined, nor is the degree of “risk” required. Given that literally every activity imaginable could represent some degree of “risk” to a person’s “health” in some way or another, this clause effectively legalizes abortion throughout the entirety of pregnancy without restrictions. All a woman needs to do is to find an abortionist willing to perform the abortion.

          This bill passed the House with 218 out of 220 Democrats voting in favor, including every single Democratic representative from California.

          The bill has not yet (and due to a filibuster probably will not) come up for a vote in the Senate. However, it was co-sponsored by several Democratic Senators, including both of your CA Senators, Feinsein and Padilla.

          So, unless you come from a rare Republican represented district, not only do you now know people who support “that kind” of abortion, you are actually represented by 3 of them!

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        • The people who support late-term abortions are doing it for ideological and quasi-religious reasons. A sort of “rights must be absolute zealotry”. The inverse of people who think abortion should be illegal in all cases, including rape and health of the mother.

          Most abortions are performed early in the pregnancy. For obvious and practical reasons. But some state laws do allow for abortion up to the moment of birth, and it does seem to happen but is a minority of abortions performed.

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        • KW:

          A sort of “rights must be absolute zealotry”.

          I wouldn’t call it zealotry on either side. I would simply call it logical.

          If one believes (as jnc said he does) that rights do not inhere in human beings until birth, then it is perfectly rational to conclude that a woman has the right to kill the baby at any time until birth.

          If one believes (as I do) that rights inhere in all human beings at all stages of existence, then it is perfectly rational to conclude that a woman never has the right to kill the baby.

          Neither of those positions is properly characterized as “zealotry”. They are simply logical conclusions based on the premise adopted.

          Of course, I argue that jnc’s premise itself is not rational, and I think that a lot of people adopt it in a sort of reverse logic….ie they want abortion to be legal, and the only way to rationalize that desire is to assume a fetus has no rights, so that is the premise they adopt. So perhaps you might characterize that as the result of some kind of zealotry, but I don’t think that lends itself to the kind of pro-/anti-abortion equivalency that you are trying to draw.

          Most abortions are performed early in the pregnancy. For obvious and practical reasons.

          What do you suppose those reasons are?

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        • lms:

          I simply think this is, or should be, a decision between partners and families.

          I understand. And other people think differently. The beauty, if Roe finally gets overturned, is that those opinions will finally be allowed to compete with each other on an equal footing in the political arena, rather than one of them being disallowed simply because 5 lawyers in robes declare it.

          I do agree there should be some restrictions but not sure where that line should be drawn.

          Well, hopefully soon you will have the chance to actually have some input on what those restrictions should be, rather than having to listen to what 5 unelected lawyers in robes tell you that will be. Isn’t democracy great?!?

          I really don’t know anyone who supports killing babies in the 9th month and if they do………….I obviously wouldn’t support them.

          Anyone who supports the existing Roe regime does. Which means you have already been supporting such people for a long time.

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        • “I really don’t know anyone who supports killing babies in the 9th month and if they do………….I obviously wouldn’t support them. “

          Are you familiar with the controversy that the former Democratic governor of Virginia, Ralph Northram, who is also a physician (pediatric neurologist), got into over this?

          “”When we talk about third-trimester abortions, these are done with the consent of obviously the mother, with the consent of the physicians, more than one physician, by the way,” Northam said. “And it’s done in cases where there may be severe deformities, there may be a fetus that’s non-viable. So in this particular example, if a mother is in labor, I can tell you exactly what would happen. The infant would be delivered. The infant would be kept comfortable. The infant would be resuscitated if that’s what the mother and the family desired, and then a discussion would ensue between the physicians and the mother. So I think this was really blown out of proportion.””

          https://www.cbsnews.com/news/virginia-abortion-bill-proposed-by-kathy-tran-third-trimester-today-2019-01-30/

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  3. You guys might be surprised to hear that I support the 15 week ban………..I actually support a 12 week ban. The problem is that the states that make these restrictions don’t actually have facilities to accommodate these early procedures. I’m a fan of prevention and access to contraceptives and education. Let me know how that’s working in TX?

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    • The politicians who voted for and enacted the legislation seem to be cruising to re-election, for what it’s worth.

      And from my study, birth control seems to be in abundant supply. Is there a reason why it wouldn’t be?

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    • lms:

      You guys might be surprised to hear that I support the 15 week ban………..I actually support a 12 week ban.

      Then your support for Roe makes no sense.

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      • That’s interesting. Apparently I’m the most “extreme” supporter of abortion on this board.

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        • jnc:

          Apparently I’m the most “extreme” supporter of abortion on this board.

          Only in thought, not in effect. Since your position aligns perfectly with that of the Democratic party, pretty much anyone who votes for D’s is as effectively extreme as you are.

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        • Well, one difference between them and me is that I think other people who disagree with me get a vote on the issue too.

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        • jnc:

          Well, one difference between them and me is that I think other people who disagree with me get a vote on the issue too.

          If you welcome the demise of the Roe regime, then you are definitely correct, and that is not an insignificant difference. They would rather see the Constitution corrupted in order to get the policy they desire than to risk getting something less than their desired policy by adhering to the Constitution.

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        • I support it as a general matter, but I do think the most Solomonesque resolution would be to send it to the states to decide for themselves where to draw the line

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    • You guys might be surprised to hear that I support the 15 week ban

      Me too!

      I feel like 15 weeks should be sufficient time. And I think in most cases it is, which is why the political classes reacting to those sorts of laws like we’re about to go
      Full handmaiden tale and it will impact millions of women seems overwrought to me. Most abortions occurs within or very near that timeframe.

      I live in Tennessee. Not big fans of abortion legislatively—we’ve got plentiful access to contraception. Planned Patenthood here focuses on abortion rights in their outreach, I notice, rather than on their free contraception services. But to my knowledge you can still get free contraception through Planned Patenthood.

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  4. “I’m a little scattered and stressed right now because of Walter’s health and an upcoming surgery”

    Sorry to hear this. I hope he comes through it OK.

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