Morning Report: The Fed hikes rates 25 basis points as expected

Vital Statistics:

S&P futures4,16130.75
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.

7 Responses

  1. The discussion here fascinates me. If debts are paid, where is the default? As in, if the Federal government is paying bonds back with tax revenue and doesn’t miss a payment, that’s not default. If the Pentagon delays payment to, say, Boeing over planes, that’s not default either as the government is a notorious late payer and Boeing knows it will get paid. Plus, if Boeing needs money in the interim there are plenty of entities willing to loan it money.

    So, why do people think catastrophe will happen? Plus, all debt holders know they’re going to get paid, this isn’t like Greece where there is literally no money or resources left to pay on a bond.

    Plus, aren’t we borrowing mostly from the Fed? If so, why wouldn’t the Fed allow for a delay in payment?

    Both parties want to make this a thing for political reasons. I say fuck it and don’t pay bonds so that borrowing costs for the Fed go up and make it harder/more expensive to borrow. Maybe then will Congress ratchet back spending.


    • McWing:

      If debts are paid, where is the default? As in, if the Federal government is paying bonds back with tax revenue and doesn’t miss a payment, that’s not default.

      Correct. As I have said innumerable times over the years, indeed every time this nonsense comes up, the debt ceiling does not have to be raised to prevent a default. If the US were to ever default, it would be by choice.

      Maturing debt can always be rolled over within the existing limit, so we can always make principle payments by simply re-issuing debt in precisely the amount that is maturing. And we have more than enough monthly tax revenues to cover interest payments. So default on the debt would never happen unless the treasury chose to either 1) not re-issue debt to make a principle repayment or 2) prioritized other government expenditures over servicing the debt.

      For some people, using the rhetoric over “defaulting” on “obligations” is intentional deception, deliberately using the language of the credit/bond markets for generic government expenditures to raise the specter of a financial catastrophe. But to be honest, with regard to places like DailyKos, I suspect it is more likely complete ignorance rather than deliberate lies. That probably goes for Biden, too.


      • “Maturing debt can always be rolled over within the existing limit, so we can always make principle payments by simply re-issuing debt in precisely the amount that is maturing.”

        They actually have a scheme to repurchase debt on the secondary market that’s discounted due to the interest rates and reissue it at the current rates to increase the actual amount they can issue.


      • It’s telling that the MSM won’t even present the position that Scott is explaining, even though it’s the accurate one.

        They are too afraid of any debate or dissent.


        • Neither party wants to deemphasize the debt ceiling. Each side uses it as a leverage point so making it a “ho-hum” event removes it’s import. When R’s are in the White House and don’t control a (or either) chamber, then the argument is a clean bill. When the conditions are reversed it’s the D’s whining. Who blinks first? I’m assuming McCarthy.

          Reminds me of government shutdowns. When R’s control the White House, they make it as painless on the public as possible and Democrats, when they occupy the WH, make it as painful as possible.


        • The MSM is openly just spouting D party propaganda whether it is true or not.


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