Atlanta Fed President Bostic said on Monday that he wouldn’t be surprised if the Fed paused its rate hikes in September. Originally, the Fed planned for 10 rate hikes in 2022 for a total of 300bps. They have done 75 so far, but with Fed members already talking about pauses, the ambitious rate hike goals seem unlikely.
We have midterm elections coming up and it’s possible the Fed creates a mini bull run in the stock market to assist some candidates. I’ve always held the view that the Fed will decrease rates in time for the Biden re-election campaign, but midterm ones are very important as well.
This week we get “health of the economy” type of data. This is very important as the Fed will use it as support for any future decisions.
- Fed Governor J Waller's speech titled “Economic Outlook and Thoughts on a Soft Landing”
- Home Price Index (YOY)
- Consumer Confidence
- Fed’s Beige Book
- Construction Spending
- ADP Employment Report
- Initial and Continuing Jobless Claims
- Unemployment Rate
Looking ahead, on June 10th we get CPI numbers (monthly and year-over-year).
You can tell from the chart above that we are in the most significant uptrend in our bonds (inversely related to mortgage rates) than we have been in the last 6 months.
There has been a lot of speculation that rates have peaked. On the “health of the economy” side of things, it makes sense. As mentioned before, 20%+ of companies in the S&P 500 are zombie companies which means they cannot afford the interest payments on their debts. When it comes time to refinance these loans, they won’t be able to and will default on their debts. I always believed that if there was a true recession, it will be ignited by the crumbling of the debt markets.
Companies are missing their quarterly expectations with inflation being the main culprit blamed. Companies are feeling pricing pressures as both the CPI and PPI have increased over the last year. I think many more companies will start looking to cost-cutting (layoffs) as they try to maintain any profit margin. It will be irresponsible for the Fed to increase rates during recessionary moments (remember, last quarter our GDP contracted by 1.4%).
The main reason the Fed is increasing rates is not because of the “health of the economy” (if that was the case, they should’ve started increasing them in the summer of 2021), but to battle that “transitory” inflation that seems to be not so transitory…I’ll be waiting on June 10’s inflation numbers and especially the month over month increase/decrease.
That’s it for this week. As always, reach out anytime with questions, comments, or debatable conversations. I’m always here!