Morning Report: Fed Week

Vital Statistics:

S&P futures3,861-27.50
Oil (WTI)82.35-2.70
10 year government bond yield 3.48%
30 year fixed rate mortgage 6.19%

Stocks are lower this morning as we head into Fed week. Bonds and MBS are down.

The FOMC will meet on Monday and Tuesday. The Fed funds futures have a 80% chance for a 75 basis point increase and a 20% chance of 100. The yield curve continues to invert, with 2s / 10s trading at 46 basis points. Note that the Bank of England and the Bank of Japan also meet this week.

The September meeting will also bring a fresh set of economic projections and a new dot plot. Investors will be looking keenly at the rate predictions for 2023 and 2024. Earlier this summer, investors were looking for a Fed “pivot” from hawkishness to dovishness in 2023. At Jackson Hole, Jerome Powell threw cold water on that idea, stressing that the policy mistake of easing too early was a driver of inflation in the 1970s. The forecasts and dot plot will interesting to see if the Fed truly believes it.

Below is a chart of the Fed Funds rate and the CPI during the 1970s. FWIW, it seems like the Fed Funds rate and inflation correlate pretty closely. I can’t see where the policy mistake lies. Maybe the rate cuts in early 1975, but inflation was decreasing at the time, and didn’t really start picking up until 2 years later.

Rising rates and home prices have conspired to depress homebuilding. You can see this effect in lumber prices, which are down considerably over the past few months. It seems like everyone expects home prices to fall over the near term, although recent prints are still in the high teens YOY. Speaking of homebuilding, we will get housing starts tomorrow.

Homebuilder confidence fell for the ninth straight month, according to the NAHB Housing Market Index.

“Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga. “In another indicator of a weakening market, 24% of builders reported reducing home prices, up from 19% last month.”

“Builder sentiment has declined every month in 2022, and the housing recession shows no signs of abating as builders continue to grapple with elevated construction costs and an aggressive monetary policy from the Federal Reserve that helped pushed mortgage rates above 6% last week, the highest level since 2008,” said NAHB Chief Economist Robert Dietz. “In this soft market, more than half of the builders in our survey reported using incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions.”

8 Responses

  1. “Biden says ‘pandemic is over’

    Impromptu remarks in ‘60 Minutes’ interview may complicate White House struggle to secure additional funding for coronavirus vaccines, tests and treatments

    By Dan Diamond
    Updated September 18, 2022 at 11:07 p.m. EDT”

    Presumably this means that all the states of emergency should be lifted and the associated special powers for the government ended.


  2. Worth noting:


  3. Abbott keeps rolling:

    “Second bus with migrants arrives outside Kamala Harris’ residence

    The migrants are the latest to arrive as part of Gov. Greg Abbott’s busing program.

    by Matthew Watkins
    Sept. 17, 20227 PM Central

    A second bus of migrants sent from Texas arrived outside the residence of Vice President Kamala Harris on Saturday, continuing Gov. Greg Abbott’s policy of sending migrants from his state to target the Biden administration over its immigration policies.

    The bus arrived before daylight outside the Naval Observatory in Washington, D.C.; a video shared by an NBC News journalist showed migrants wearing masks and carrying pillows walking off the bus and into a city that has declared a public health emergency due to the influx of migrants. A spokesperson for Abbott confirmed that the bus came from Texas.”


  4. Good read. Probably applies to those of us on this space too:

    “A Farewell To A Friend
    Patrick, Co-Blogger and Has Passed

    Ken White”


  5. George, Sasha Stone takes your side on the DeSantis immigration incident.

    “Moral Superiority Won’t Fix the Border Crisis or Anything Else
    Is that really the plan?

    Does that make what Ron DeSantis did right? I guess the better question might be, what else should he have done? Only an event the press could not ignore – that blue-check Twitter would use to showcase their own moral virtue — would pierce the bubble of the Left and send the message that the situation was getting dire.”


    • I tend to agree. It didn’t have to be DeSantis doing it but there needs to be more folks on the right actually fighting the progressives and especially forcing them to experience the consequences of their policies, which they are normally immune from.

      But like I said: DeSantis needs to be able to come out the winner in a battle like this or he’s not going anywhere. And I think he stands a good chance of doing just that.


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