Sorry for being a day late this week, I was celebrating my anniversary this weekend, so no work at all.
We have a little bit of a longer newsletter this week since we are coming off the back of the most important week of the year.
The first part of last week played out exactly as it did in the past when the Fed spoke. Monday and Tuesday were bad days for rates followed by a good day on Wednesday when the policy was announced and Powell spoke. Then, that was followed by a negative GDP report.
I’ll admit, I thought the numbers were going to be more negative than Q1, but they came in at -0.9% (Q1 came in at -1.4% and was later revised down to -1.6%). Funny enough, the government is taking people for fools by trying to convince them/us that 2 quarters of negative GDP is no longer the definition of a recession.
As I predicted, the gov is turning to a strong labor market as proof that we are not in a recession. Even if the labor market is as strong as they say, inflation has led to an increase in prices that has far outpaced wage increases. The flow of money across the economy has slowed in this inflation-led recession. Expect more weight to be held on jobs reports as we move forward.
The markets rebounded on the GDP news. Mortgage rates were better (again: rates increase to fight inflation and decrease to fight recession) and the markets rebounded into risk-on assets as they interpreted dovishness in Powell’s speech.
I believe it to be too early to pop the champagne and as I’ve said before, would like to see a decline (or at least plateau) in the month-over-month CPI. If August comes in at or below 9.1%, then I will change my tune, a bit.
I do think the Fed still raises rates in September. The difference will be whether it is 50bp or less vs. 75bp or more. That will determine the direction of the market.
Those fearing rates going in the high teens just like Volcker did in the 80s have to remember that back then, debt was 35% of GDP. The Fed was able to afford that move. Now our debt is over 100% of GDP. It would shut the gov down to increase rates anywhere near that level.
I don’t think the rate hikes are done but I feel like we may be at a point where they lessen. If so, markets will rejoice. August CPI is very important, followed by September’s. Fed is at Jackson Hole next month so their next monetary policy decision won’t be until the end of September.
Here is what’s in store for this week. We hear from a few Fed members, get some housing data, and a bunch of labor statistics (unemployment rate on Friday)
Tuesday
- Job openings/quits
- Rental vacancy rate
- Homeowner vacancy rate
- Real household debt
- St. Louis Fed President Bullard speaks (hawk)
Thursday
- Initial and Continuing Jobless Claims
- Cleveland Fed President Mester speaks (hawk)
Friday
- Unemployment Rate
Chart Check(see above)
We have gotten our first mini uptrend in a while in the 30YR MBS and it feels good. The excitement is back in our voices when talking to clients and many are talking about floating again.
And although I am enjoying this as well, what I want to point out is often times an extreme level is retested before an official new trend takes place. If you look back at August to December of last year when rates really started to make their shift. You can see that the top ceiling was tested and retested a bunch of times before a new trend took place. On the technical side of things, we’d want the recent low to be retested, held, and bounce off.
Granted, that new trend last year really started taking off with the Fed jawboning about raising rates and inflation not being so transitory anymore. If we see a shift in their policy to ease more…game on. But I just wanted to point this out again.
Click HERE to stay current with the Fed’s meetings this year. You can also view the statements and minutes from previous meetings.
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