Morning Report: The Fed hikes aggressively

Vital Statistics:

S&P futures3,699-94.25
Oil (WTI)113.21-2.64
10 year government bond yield 3.43%
30 year fixed rate mortgage 6.03%

Stocks are lower this morning as markets digest the Fed’s move yesterday. Bonds and MBS are down.

The Fed raised the Fed Funds rate 75 basis points yesterday. This was the biggest increase since 1994. We got a new set of projections as well, with the Fed raising its inflation and unemployment forecasts and cutting GDP growth forecasts. The dot plot moved upward pretty dramatically. You can see the June versus March plots below:

The central tendency in March was for a Fed Funds rate between 1.75% and 2% by the end of the year. That forecast is now 3.25% – 3.5%. The forecast for 2022 GDP was lowered from 2.8% to 1.7%, while the forecast for unemployment was moved up from 3.5% to 3.7% and the forecast for inflation was increased to 5.2% from 4.3%. The core inflation forecast (ex-food and energy) was bumped up slightly from 4,1% to 4.3%.

Jerome Powell said the central bank focused a lot on the University of Michigan sentiment index, especially the part about inflationary expectations. The median expectation for inflation was 5.4%, but the mean was 7.4%. That is a big concern for the Fed. The fear is that we get a wage-price spiral, where prices rise, workers demand higher compensation, which increases prices and drives further inflation. The big question concerns whether the Fed is chasing oil prices. Since the Fed has no control over commodity prices, it really should focus on core inflation. That said, its mandate is to manage headline inflation, so it may be forced to overreact to rising food and energy prices.

With the Atlanta Fed predicting 0% GDP growth this quarter, and the lousy retail sales print yesterday, we might already be in a recession. And if we are, we might be getting to the point where bad economic news is considered good news since investors will assume economic weakness will take the top off inflation and allow the Fed to take a breather on rate hikes. The minutes to the June meeting will be interesting to read.

So far, the yield curve has steepened in response to the meeting, with 2s / 10s trading at 14 basis points. Corporate credit spreads are behaving as well, so we aren’t seeing indications that economic weakness is spilling over into the financial sector, at least not yet.

Housing starts disappointed again, as rising home prices, mortgage rates, and materials prices make new houses expensive. Starts fell 14% MOM and 4% YOY to a seasonally-adjusted annualized pace of 1.55 million. Building Permits came in flat YOY at 1.7 million.

The NAHB / Wells Fargo Housing Market Index (which measures builder sentiment) fell to the lowest level since June of 2020. This is the sixth consecutive monthly decline. Building materials costs are up 19% YOY, except for lumber.

Housing remains a weak part of the economy, however it usually leads the economy out of a recession. If we get some relief on inflation and rising interest rates, perhaps the housing sector will get some legs later this year or next.

21 Responses

  1. Tom Hanks says that he couldn’t play the part of a gay man in a movie today the way he did when he won the Oscar for Philadelphia. And, he says, “rightly so”. The part should go to a gay man.

    This, despite the fact the very raison d’etre of an actor is to portray characters that he is, in fact, not. The leftist thought process is an utter mystery to me. Completely nonsensical.


    • It is because it isn’t a thought process – the left operates on emotion which is by definition nonsensical and capricious.


    • No more biopics then, right?

      At least the new Elvis movie is in the can, thank heavens for small favors.


    • Impressive. Now they are self cancelling.

      Someone should ask him if he’s going to return the Oscar given his epiphany about identity and acting roles.


    • “The leftist thought process is an utter mystery to me. Completely nonsensical”

      No it’s not. It’s actually quite simple. Identity trumps all, and everything shall be determined by the hierarchy of victimhood.

      The detailed version can be found in Wesley Yang’s Substack under Successor Ideology.

      It’s still bullshit, but it’s not a mystery.


  2. From Ben Shapiro:

    Gender Affirming Therapy: Telling a little girl she is a boy
    Conversion Therapy: Telling a little girl she is a girl.


  3. I guess it’s just not capturing the hearts of Americans?


    • The “reminder” is an extra special touch…as if it has anything to do with….anything.


    • “democracy” = “the political interests of democrats”


    • They pay good money to be able to show the golfing.

      At the same time a one-sided political argument isn’t uniquely about democracy. Someone facing the camera while reading Orwell’s 1984 would tell you a lot more about democracy. And nobody is whinging that they aren’t doing that right now.


    • The funny thing would be if they had cut to the Saudi LIV golf tour.


  4. Biden conducts a master class in empathy.


  5. President Depends claims we’re mentally unwell for being dissatisfied with his Presidency.

    But no mean tweets so we I guess things could be worse, amiright?


  6. Progs doubting Trump criminal conviction amuses me.

    And Prog doubts about the fidelity of DC juries will always fascinate me.

    Very little has been presented that was not pub knowledge a year ago. I will certain stipulate that some of the presentations have been effective at packaging all this old info for a public that rarely pays attention.
    At the end of the day, we are left with this basic problem. A criminal charge requires a unanimous jury. How can anybody ever assemble a jury that doesn’t have at least one MAGA lunatic?

    While many on the left have obsessed about Roe or defunding police, the SCOTUS decided in Ramos that every major criminal prosecution requires an unanimous jury (if tried by jury.)

    MindMatter June 17 · 04:23:28 PM

    Trump being tried and convicted between the nomination convention and election is as certain as death and taxes.


  7. Relax errybody! Biden’s got this!


  8. “Unexpected”.

    Remind me to not let those surprises by this news anywhere near my money.


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