pebblewriter

Tag: fed

  • No Pressure

    Futures are off about 2% following yesterday’s FOMC announcement and press conference – the closest we’ll probably ever get to a mea culpa – which was accompanied by the usual algo nonsense. Suffice it to say, traders have come to their senses and markets are once again reflecting the likelihood of the Fed tightening into a recession.

    Our algo remains on track, with much lower prices to come after whatever this bounce amounts to. Note that tomorrow is OPEX and Goldman estimates that options representing a huge $3.4 trillion in notional will expire ahead of a 3-day weekend. No pressure…

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  • Welcome to the Future

    Remember the post from last July [see: Time to Sell Your Home?] regarding the effect of rising interest rates on housing prices?

    With mortgage rates at 2.60% at the time, we did some simple calculations to show the impact of an increase in rates to as high as 6%. A $1 million house with a mortgage payment of $4,203, for instance, would need to drop to $667,733 in order for the payment to remain the same for a new buyer.

     

    With inflation spiking, we felt it was only a matter of time before interest rates shot higher too.Don’t look now, but the future is here. The pundits say that about one-fourth of all sales are to cash buyers, so higher rates won’t necessarily matter. Maybe. But, nearly every crash in the history of the markets has started with the words “this time is different.”

    Don’t say we didn’t warn you.

  • PPI Still Running Plenty Hot

    PPI dropped just a bit from last month, registering 10.8% YoY (unadjusted) for May versus 10.9% for April and 11.5% for March.  The MoM tally was +0.8% for May versus 0.4% for April.

    The very slight drop in the YoY data is unlikely to assuage the Fed’s fears about inflation being out of control. But, it’s enough to contribute to a slight bump in futures heading into the two-day FOMC meeting and OPEX.

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  • Charts I’m Watching: Jun 13, 2022

    ES dropped over 100 points overnight to tag our 3802 target.

    The other perhaps more significant target to be tagged is the 10Y. It topped our 3.248 target and is currently trading at 3.28.Our analog continues to perform beautifully.

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  • Inflation Reaches a New 40-Year High

    CPI soared to a new 40-year high: 8.6% YoY and 1.0% MoM. Core also exceeded consensus, coming in at 6.0%.

    Futures are not amused, as this takes anything less than a 50 bps rate hike next week off the table. A 75 bps hike is suddenly a real possibility.

    Needless to say, our analog remains very much on track.

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  • Inflation Update: PCE

    PCE comes out later this morning, providing the most up-to-date picture of the challenge facing the Fed. Judging from yesterday’s 2% pop, investors are hopeful that inflation might be leveling off. Futures are off very slightly.

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  • Economic Data Deluge Begins

    It’s a big week for economic data, with earnings and outlook announcements already setting a bearish tone.  First up this morning is April new home sales, which came in at 591k units – a 16.6% drop from March and a 32.9% plunge from April 2021. It barely beat the 2020 pandemic lows.

    As everyone now knows, this is a direct result of the sharp rise in mortgage rates which is a direct result of the sharp rise in inflation resulting from the Fed’s policy mistake: driving rates much too low for much too long as discussed last July [see: Time to Sell Your Home?]

    Over the past month, it has seemed that the old “bad news is good news” meme which played such an important role during ZIRP had been sidelined. Based on recent Fedspeak, however, it’s probably better characterized as being in cold storage. The Fed’s determination to reduce inflation will be sorely tested in the days ahead.

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  • Sure OPEX, But Then What?

    Futures are up about 1% this morning – par for the course for an options expiration Friday. The Chinese prime rate cut is no doubt helping.

    But, what happens next week as new and pending home sales, durable goods, FOMC minutes, GDP, PCE and Michigan Sentiment come rolling in? This will be a serious test of the market’s ability to hold its lows, let alone continue to bounce.

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  • A Failure to Communicate

    Remember that scene in Cool Hand Luke where Paul Newman mouths off to the Captain after a failed escape attempt? He doesn’t initially appreciate the gravity of his situation. He is soon reminded.

    That’s what yesterday’s post-Fed presser felt like. Powell was trying to convey the sense that the Fed means business. It is going to get serious about escaping the inflationary mess it has stepped in.

    The market (well, the algos) didn’t hear that. They heard Powell say exactly what they expected and, spurred on by the huge bets lined up on the bearish side of the ledger, decided to mouth off.

    Clearly, they don’t appreciate the gravity of the situation, as we were reminded by this morning’s labor productivity report – the worst in 75 years.

    We would do well to remember that we’ve had these moments of euphoria before. The carefully curated decline which began in late March…

    …has seen more than a few deviations of late.

    But, facts are still facts. Inflation – especially very sticky labor costs – is still a problem, and the Fed waited so long that they now have no choice but to tighten into a recession. There was a time when they could have engineered a soft landing. But, that opportunity was, dare we say, transitory.

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  • FOMC Day: May 4, 2022

    Today’s FOMC meeting is one of the most anticipated and consequential in years. It’s difficult to overstate its importance in terms of economic impact and, perhaps more importantly, Fed credibility.

    Yes, we care about whether the Fed hikes 50 or 75 basis points – though either is unlikely to put a dent in inflation. The bigger question is what the Fed does with its $9 trillion balance sheet.

    Futures are up modestly.

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