All Things in Moderation

Vital Statistics:

Stocks are lower this morning as markets digest hawkish comments from Fed speakers. Bonds and MBS are down.

We had some hawkish Fed-speak yesterday, and markets are in a risk-off mode.

Cleveland Fed President Loretta Mester gave a speech yesterday. “The FOMC has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do.  Precisely how much higher the federal funds rate will need to go and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down, and that will depend on how much demand is slowing, supply challenges are being resolved, and price pressures are easing.  At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5 percent and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2 percent.  Indeed, at our meeting two weeks ago, setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5 percent“

In a separate speech, James Bullard said: “I was an advocate for a 50-basis-point hike and I argued that we should get to the level of rates the committee viewed as sufficiently restrictive as soon as we could….Inflation remains too high but has declined,” adding that “continued policy rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets.”

The March Fed Funds futures are now factoring in a 21% chance of a 50 basis point hike at the March meeting. The 10 year yield has moved up dramatically in the past 2 weeks.

Mortgage originations came in at $498B in Q4, according to the Fed. This resembles pre-pandemic volumes. Delinquency rates ticked up as well. Total household debt rose to $16.9 trillion.

The Index of Leading Economic Indicators declined again in January, according to the Conference Board. “The US LEI remained on a downward trajectory, but its rate of decline moderated slightly in January,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board. “Among the leading indicators, deteriorating manufacturing new orders, consumers’ expectations of business conditions, and credit conditions more than offset strengths in labor markets and stock prices to drive the index lower in the month. The contribution of the yield spread component of the LEI also turned negative in the last two months, which is often a signal of recession to come. While the LEI continues to signal recession in the near term, indicators related to the labor market—including employment and personal income—remain robust so far. Nonetheless, The Conference Board still expects high inflation, rising interest rates, and contracting consumer spending to tip the US economy into recession in 2023.”

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