Morning Report: Neel Kashkari says a June pause doesn’t mean the Fed is done

Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat.

The week ahead has some important economic data with new home sales, GDP and Personal Incomes / Outlays. The Personal Income / Outlays report contains the Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation. Markets will close early on Friday for the Memorial Day Weekend.

We will also get the minutes from the May FOMC meeting on Wednesday. That will be interesting since there should be plenty of discussion about the regional bank situation. I want to see how many voters were willing to pause rate hikes, but went along with the consensus.

Minneapolis Fed President Neel Kashkari said that even if the Fed pauses rate hikes in June, the markets shouldn’t take that as an all-clear signal. “Right now it’s a close call either way, versus raising another time in June or skipping,” the central bank official said on CNBC’s “Squawk Box.” “Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done. If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information. Markets seem very optimistic that rates are going to fall now. I think that they believe that inflation is going to fall, and then we’re going to be able to respond to that. I hope they’re right,” he added. “But nobody should be confused about our commitment to getting inflation back down to 2%.”

Despite 500 basis points of tightening, the economy remains quite strong. The Atlanta Fed’s GDP Now Index sees Q2 growth at 2.9%.

Troubled regional bank PacWest is up this morning after reaching a deal to sell a portfolio of construction loans to an investment firm. The regional banks are all up in sympathy this morning.

Mortgage applications for new home sales rose 4.1% in April, according to the MBA. “Purchase applications for newly constructed homes declined in April but were up 4 percent compared to a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “This was the third straight month of year-over-year growth in applications, which signals improving housing demand for newly built homes at a time when the broader housing market is leaning more on new construction to boost for-sale inventory levels. Mortgage rates have settled in the 6.5 percent range lately and remain over a percentage point higher than last year. The higher mortgage rate environment continues to factor into homebuying and selling decisions.”  

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