We have the potential for a volatile 2 week period ahead of us. This week, we hear from a lot of Fed members ahead of next week’s (4/11 & 4/12) inflation data. The markets will be weighing every word closely this week. For the inflation data after, we just need to see things go from bad, to less bad, in order to see a positive reaction in the bond markets. Investors will be trading the turning tides of the trend, should there be one, or will sell-off on news of higher, uncontrollable, inflation.
Assuming no change in the trend for inflation, rates should continue rising (whether the Fed raises them or not). Mathematically, this should decrease the demand for loans which should cause home prices to decline in order to meet that subdued demand. However, as you can see from Jeff Kaminski’s quote above, the problem with the supply of homes is still here. Prices may not drop as much as borrowers are hoping for, especially in sought-after locations.
- Fed Gov Lael Brainard speaks on inflation inequality
- SF Fed President Mary Daly speaks on the economy
- NY Fed President John Williams speaks
- Philadelphia Fed President Patrick Harker speaks on the economy
- FOMC minutes released
- Initial and continuing jobless claims
- St. Louis Fed President James Bullard speaks on the economy
- Fed bank presidents Evans and Bostic speak on employment
I said there would be a rebound from the huge negative action we saw on Friday 3/25. Like a rubber band that gets stretched too much will snap back to reality. Remember, most of the time these markets trade-off of day-to-day emotions. As long as we can see the long-term narrative correctly, we will be able to position ourselves and our clients in a better position.
That large red candle you see above is from 3/25. We saw a mild snap back on Monday, but it raged on through Tuesday and Wednesday. Markets are deciding on the validity of this sideways channel. I expect there to be some volatility bouncing around the comments of the Fed this week, but traders will be waiting on the sidelines for confirmation if MBS breakout out of the channel (either to the upside or downside). Inflation in the following week will definitely be a deciding factor.
Long Term Narrative: I’ve been saying since the fall of last year that we are due for higher rates. The Fed has to do something to battle inflation or else they will be blamed for incompetence and may lose their jobs. But they can’t really increase the cost to borrow money because the economy is fixed on its cheap supply. They may increase a few times, but the damage will be too severe that eventually, they will need to decrease again. I personally believe this will occur in time for re-election campaigns. Nothing wins votes like feeling like you’re richer due to a housing and stock market rally. Unfortunately, people believe a strong stock market equates to a strong economy.
I’m not floating this week. There’s too much riding on what Fed presidents say, and not data. I’m also advising clients against paying points for rate. I’m letting them know of my long-term narrative/thesis and what we are doing today that preps us for the future.
That’s it for this week. I hope everyone had a great weekend and please do not hesitate to reach out anytime. I’m always here to help!