Current position: Carefully Floating
Stocks are higher and mortgage bonds are lower to start the day.
Fed Speak
Pressuring the markets yesterday were comments from Fed Presidents Bullard and Logan, as well as Ray Dalio's warning that the debt ceiling crisis could be "catastrophic" for the economy.
Bullard said he's more inclined toward a rate hike. Additionally, Logan said that the data doesn't justify a pause and that she would like to hike again next month. As a result of their comments, the rate hike odds moved up to 40% at the next meeting on June 14th. Not too long ago, these odds were closer to zero.
Powell will be speaking at 11:00 a.m. ET, and his comments can, of course, impact the markets. We will update you with anything noteworthy in the market news section of the website.
Leading Economic Indicators
The Fed is clearly looking in the rearview mirror, as the forward-looking economic indicators are providing all the data you need to know that the economy is slowing. The Conference Board's index of leading economic indicators (LEI) fell 0.6% in April, down for thirteen consecutive months. The index is now down 8.0% year over year.
The Conference Board forecasts a contraction of economic activity starting in Q2, leading to a mild recession by mid-2023. To that note, the LEI being down 13 months in a row and -8.0% on a year-over-year basis has provided a recession signal 100% of the time in the past.
Historically, the average length of time from the LEI peak to the start of the recession was 13 months, while the median was 11 months. We are at 16 months right now since peaking in December 2021, meaning we are likely due for a recession.
Next Week
Tuesday: New Home Sales
Wednesday: Mortgage Apps, Fed Minutes
Thursday: Initial Jobless Claims, Q2 GDP, Pending Home Sales
Friday: PCE Inflation, Durable Goods Orders
Technical Analysis
Mortgage bonds are testing an important floor of support at 99.845, which is holding for now. If this level is broken, the next stop is 99.7.
The 10-year broke above the 3.644 ceiling we were watching yesterday, prompting our call. Now yields are in a new range, with the next ceiling at 3.786. Even though we don't like the technical picture, we want to wait to hear from Powell to see if his comments can help the markets. After locking yesterday and on Tuesday, we can begin the day carefully floating.
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