All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,161	30.75
Oil (WTI)	76.03	-0.37
10 year government bond yield		3.36%
30 year fixed rate mortgage		6.08%

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

As expected, the Fed hiked the Fed Funds rate by 25 basis points yesterday. The vote was unanimous and raised the target range to 4.5%-4.75%. They signaled that the tightening cycle is not done: “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Stocks and bonds loved the announcement, with the 10-year bond yield falling 9 basis points in the immediate aftermath of the announcement, while the S&P 500 tacked on close to 100 points. Jerome Powell acknowledged that inflation has moderated but stressed the need to stay the course.

The Fed Funds futures currently see a 85% chance of another 25 basis point hike in March, with 15% handicapping no change in policy. The markets see a 30% chance of another 25 basis point hike at the May meeting. The yield curve continues to invert, with the 2s-10s spread at -71 basis points.

The ECB also hiked rates 50 basis points this morning, which is kicking off a furious rally in European sovereign yields. The German Bund yield is down 17 basis points, while UK Gilt yields are down 21 basis points. Global sovereign market tend to correlate pretty closely, so this provides further impetus for lower rates.

Nonfarm productivity increased 3% in the fourth quarter of 2022, which was above Street expectations. Output increased 3.5% while hours worked rose 0.5%. Unit labor costs rose 1.1% as compensation rose 4.5% and productivity rose 3%. During 2022, nonfarm productivity fell 1.3%, which was the worst annual reading since 1974. Declining productivity and inflation go hand-in-hand.

This number will almost certainly push the Fed towards a tighter monetary policy since it largely feeds into the services ex-housing component of inflation which is wage growth. Higher compensation without a corresponding increase in output = lower productivity and higher inflation overall.

Job cuts increased substantially in January, according to outplacement firm Challenger, Gray and Christmas. U.S. based employers announced 102,943 job cuts in January, compared to 43,651 in December and 19,064 a year ago. Tech companies have made lots of announcements and many over-hired during the pandemic years. “We’re now on the other side of the hiring frenzy of the pandemic years,” said Andrew Challenger, labor expert and Senior Vice President of Challenger, Gray & Christmas, Inc. “Companies are preparing for an economic slowdown, cutting workers and slowing hiring,” he added. Tech and retailers accounted for the bulk of the job cuts. Where are companies hiring? Entertainment and Leisure.

Despite the numbers from Challenger, initial jobless claims remain exceptionally low, coming in at 183,000 last week.

Pulte Homes announced fourth quarter earnings, with a 20% increase in revenues and a 200 basis point increase in gross margin. The increase in gross margin means that Pulte hasn’t been forced to grant concessions to move the inventory. That said, these Q4 sales were initiated earlier in 2022 before mortgage rates spiked.

Orders were down 41%, which reflects an elevated cancellation rate of 32%. Interestingly, the stock market is looking over the homebuilding valley. The homebuilder ETF (XHB) is up 29% over the past 3 months.

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