All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,051	-33.00
Oil (WTI)	79.39	-0.27
10 year government bond yield		3.56%
30 year fixed rate mortgage		6.15%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up.

The week ahead will be dominated by the Fed meeting on Tuesday and Wednesday. The Fed Funds futures are pretty much a lock for 25 basis points hike. We won’t get any new dot plots or forecasts.

In terms of economic data, we will get some housing price data with FHFA and Case-Shiller, ISM data and the jobs report on Friday. We will get earnings from Google, Facebook, Amazon, and a slew of other major companies.

Investors are going to want to see evidence that the Fed thinks it is getting some traction on inflation. Since monetary policy acts with a lag, by the time the data suggest that inflation is over the Fed is at risk of overshooting. That is certainly the fear right now, although the labor market does remain robust. The supply chain issues that drove up costs early in the pandemic have worked themselves out, and housing will disappear as a driver by this summer. A lot will continue to hinge on wage growth.

The Atlanta Fed’s GDP Now estimate for Q1 is a mere 0.7%. Note that the GDP Now estimate was significantly higher than the first estimate for Q4 GDP growth – about 60 basis points too high.

Jeffrey M. Lacker and Charles I. Plosser penned an op-ed in the Wall Street Journal about Fed policy and inflation. They discuss the use of rules like the Taylor Rule which calculate a Fed Funds target rate. Based on the inflation numbers we saw in December, these rules suggest the Fed Funds rate should be 8%. From the oped:

“While inflation readings have fallen in recent months, substantial upward pressures remain, particularly in wage-setting and service-sector prices. These present sizable upside risks, as do rates that remain below the prescriptions of historically grounded rules. If inflation persists at its current four-quarter rate of 5.5%, policy-rule recommendations for the funds rate range from 6.5% to 8% by the end of the year, substantially above what the Fed and markets are currently expecting.”

“Interest rates could go much higher than the public realizes. Helping people understand the policy rules and how they inform the Fed’s thinking would be far more constructive than asking the public to decode ambiguous phrases such as “sufficiently restrictive.” Using the prescriptions of systematic policy rules would also bolster the Fed’s credibility by providing well-grounded benchmarks for how policy ought to respond to incoming data, thereby dampening perceptions that Fed policy choices—such as when to stop raising rates or when to reverse course—might be arbitrary or responsive to political considerations.”

Redfin put out a piece on how the housing market is beginning to recover. Condos and luxury properties are unpopular, but smaller properties that are well-maintained in good school districts are moving quickly. “Buyers are out there, but they’re making low offers and asking for concessions. They don’t seem ultra committed to homes like they used to. If they write an offer and they don’t get exactly what they want, they’re happy walking away. I recently heard about one seller who offered to pay the first three months of a new owner’s mortgage payment. There’s still a lot of cautiousness on both sides of the deal.”

Interestingly many sellers are reluctant to list their property because they want to stick with their ultra-low mortgage rate. Redfin noted that many of these sellers are deciding to rent their property and move up into a bigger one.

The Biden Administration is planning on releasing a Tenant Bill Of Rights, which has been drafted by community organizers and pro-tenant lawyers. It will attempt to find a way to impose national rent control. Ultimately the problem is that housing is in a dire shortage, and these measures will do nothing to increase supply – if anything expropriation of property rights will cause investors to raise the required rate of return to take into account regulatory risk, which means new investment will get harder, not easier.

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