Current position: Carefully Floating
If you missed yesterday's interview with Morgan Stanley's Mike Wilson, you can watch the replay HERE.
Stocks and mortgage bonds are both moving higher this morning as the markets digest yesterday's Fed meeting.
And speaking of central banks, the ECB hiked rates by 25 bp to 3.5%, which was expected, as they are well behind our 5 to 5.25% Fed Funds Rate and their inflation is hotter than ours.
Fed Meeting Breakdown
Fed leaves rates unchanged but very hawkishly skips
Fed members think there will be two more 25bp hikes.
Forecasts core PCE inflation at 3.9% by the end of the year, up from 3.6%.
Unemployment Rate expected at 4.1% end of year vs. 4.5% previously
GDP expected at 1% vs. 0.4% previously
Bottom line: The Fed paused at this meeting to give themselves more time to assess incoming data, but they seem hell-bent on getting core PCE inflation down to 2%, which will be very hard to do. We would have to see, on average over the course of a year, 0.166% inflation readings, which we have not seen in a very long time. We now know some of the reasons why mortgage bonds have not responded as well to lower inflation readings: the bond market was worried that the Fed would signal more hikes ahead.
It is important to note that the Fed's projections on the Fed Funds Rate are wrong more than 2/3 of the time, and if we do see inflation and jobs come down, the Fed may still pause at the July Meeting.
Initial Jobless Claims
Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, remained at a very elevated level of 262,000 after last week's slightly higher revision. This shows that last week's high print was not an anomaly, and the trend up and to the right in claims is clear. The latest reading is the highest since November 2021. The 4-week moving average rose to 247,000.
Continuing Claims, or those that continue to receive benefits after their initial claim, rose by 20,000 to 1.775 million.This metric remains at some of the highest levels we have seen in a long time and shows pretty clearly that hiring has slowed as people continue to receive benefits and not find a new job. Some of the dropoff in this number from 1.8 million could be from benefits expiring, not just people finding new jobs.
With everyone at the Fed focused on the labor market, this was an important real-time report showing that the labor market is weakening.
Retail sales rose 0.3% last month, which was better than expectations and up 1.6% year over year. Core retail sales were about as expected.
Industrial production was weaker than expected, and capacity utilization fell, which is deflationary as factories at lower capacity have less pricing pressure. This corresponds to producer inflation falling.
Mortgage bonds tested support at 99.484, but were able to bounce higher and are now testing resistance at the 25-day moving average. The 10-year is down sharply, breaking back beneath 3.77% and now trading at 3.73%. There is room for yields to improve until they reach the 200-day moving average of 3.65%. Continue carefully floating.