Morning Report: Awaiting the Fed

Vital Statistics:

Stocks are higher as we await the FOMC decision. Bonds and MBS are up.

The FOMC decision is due at 2:00 pm today. Investors will be looking for language that suggests a pause in rate hikes. We are seeing more Fed officials call for a pause given the First Republic situation. The Fed Funds futures are overwhelmingly predicting 25 basis points today, but the June futures are now assigning a below 10% chance of another 25. Late last week, that number was about 25%.

Larry Summers was interviewed on Bloomberg TV yesterday, and the interviewer asked about reports that up to half of US banks would have negative equity if everything was marked to market. I personally have not seen such reports, but that is a remarkable statistic if true.

Larry’s answer didn’t push back against that claim, however he called it somewhat alarmist because it didn’t take into account that many banks have deposit rates below the interest rate earned on these Treasuries and MBS assets, so they are earning a spread and that below-market rate deposits could be considered asset-like. Of course the problem with that theory is that the bank isn’t in control of that asset. It doesn’t get to determine whether it stays on the balance sheet – the depositor does.

Ultimately, we are talking about Treasuries and MBS and these assets are money good. Now commercial real estate (especially office) is struggling and that could dent the banks.

The economy added 296,000 jobs in April, according to the ADP Employment Report. This was well above expectations and is higher than the forecast for Friday’s jobs report. Pay gains overall rose 6.7%, although the pace of gains is moderating. Job changers saw an increase of 13.2%, a percentage point lower than the previous month and the lowest level since November 2021.

“The slowdown in pay growth gives the clearest signal of what’s going on in the labor market right now,” said Nela Richardson, chief economist, ADP. Employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs.”

Manufacturing jobs fell, as did professional and business services. Leisure and hospitality accounted for over half the job gains.

Between the banking situation and the inflation situation, the Fed is in a bind. The surest way to fix the banking system is to lower rates, while the inflation situation is not fixed yet. The easiest path is probably to pause and wait to see how things shake out.

The services economy improved in April, according to the ISM Services Index. Employment decelerated, while new orders increased. Prices advanced as well. “There has been a slight uptick in the rate of growth for the services sector, due mostly to the increase in new orders and ongoing improvements in both capacity and supply logistics. The majority of respondents are mostly positive about business conditions; however, some respondents are wary of potential headwinds associated with inflation and an economic slowdown.”

15 Responses

  1. Looks like Fox News has decided to enlist The Washington Post and the New York Times in their campaign against Tucker Carlson:


  2. None of them actually believe he’s a “threat to democracy”. It’s always been about the ratings:

    “CNN and Trump set aside beef for ‘town hall,’ and both draw fire for it
    The announcement prompted surprise and shock, aimed at both the network and the former president.

    CNN says it’s doing what it’s always done during election cycles.

    By Paul Farhi
    May 3, 2023 at 10:10 a.m. EDT

    Donald Trump has spent the better part of the past seven years badmouthing CNN, attacking its reporters as “enemies of the people” and calling its reporting “fake news.” He once tried banning one of its journalists from the White House. He routinely mocks its eroding ratings.

    Yet on Monday, CNN offered to put Trump on the air live for an hour in prime time — and Trump accepted.

    Proving that bygones can be bygones, CNN lined up Trump for its first “town hall” telecast of the 2024 presidential campaign. The twice-impeached, once-indicted former president will take questions from Republican and independent voters in a CNN-produced event next Wednesday in New Hampshire, the state that will hold the first Republican primary next year.”


    • The MSM elevated Trump in 2016 because they thought he would be the easiest for hillary to beat.

      It is nothing more complicated than that.


      • No, they also get better ratings and make more money when he’s in the news.


        • I think the commercial aspects of the news business take a backseat to the ideological aspects.

          If they didn’t the media wouldn’t be competing for half the audience while leaving the other half unserved.

          They are the democrat party’s propaganda organ.


  3. Hard to believe he was fired.


    • Do you think the national security state considers a Republican president a legitimate Commander in Chief?

      I suspect that it doesn’t.


      • Oh, they would consider Cheney, etc legit.


        • I don’t think so any more. obama achieved ideological conformity and the national security state works for the democrats only.

          Has the national security state evinced any interest at all in finding the leaks about the Russian Collusion Hoax? of course not. they were all aboard with it. And now that they have gotten away with it, chalk up another institution in the left’s column.


        • That is a fascinating turn of events re Cheney and Nat Sec now considering the Cheney’s as legit.


        • I think the national security state’s test of legitimacy is whether or not one supports the national security state.


        • Bingo! And the Cheney’s and Bushes are apparently back in the tent. Their Admin has been forgiven.

          For how much of the electorate base their decision I. Part or in whole on what the National Security State thinks?

          Over the years I’ve done a 180 and a Nat Sec endorsement is a definite never vote for.


        • I don’t think they were ever on the outs with the national security state. They expanded it massively with the war on terror and also removed a lot of the previous constraints.

          As Taibbi noted, the Democrats then just took what the Bush administration built and turned it on their domestic opponents.


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