Powell’s Tough Talk Continues

  • We mentioned on Monday investors were going to be looking for clues both for how the economy is reacting to the early rounds of rate hikes, and also additional clues as to the path of those rate hikes. The market and Fed Chair Powell offered up some partial answers to both those questions.

 

  • In an interview with the WSJ yesterday, Powell made it clear they could and would hike past the neutral rate if it meant still having to deal with inflation pressures. The current estimate of neutral is around 2.50% but it’s far from a precise figure. It’s more like you know it once your past it and that implies that if the Fed is willing to go past whatever neutral is they also are willing to bring the economy close to or into recession.

 

  • We’ve said it before and we’ll say it again that the Fed, in this cycle like many cycles in the past, seems more than willing to hike until they break something, and given the lagged nature of monetary policy they will know they’ve broken something only after the fact.

 

  •  The market too is providing some clues as to how higher rates are being handled, particularly in the rate-sensitive housing sector.

 

  • Weekly mortgage applications for May 13 were the second weakest since the lockdowns back in 2020 (see graph below). These high-frequency series can be volatile so we caution about reading too much into any one week’s data print, but still applications came in exceedingly weak. Overall mortgage applications were down 11%, the lowest since February, and as we said the second lowest since the pandemic began. Both purchase apps(- 11.9%) and refinance apps (-9.5%) contributed to the decline as 30-year mortgage rates held around 5.50% compared to 3.15% a year ago and 3.27% when the year began. Three of the last five weeks have seen declines in mortgage applications and the two positive weeks were low single-digit increases.

 

  • Also out this morning, April housing starts and permits were down slightly from the prior month. Admittedly, both starts and permits remain at solid levels but a plateau in both seems to have been reached in early 2022.

 

  • With shelter costs one of the driving factors behind the increase in service-side inflation from the April CPI, the Fed will want to see some definite cooling in the housing market and wouldn’t mind some moderation in those recent price gains. The early indicators are that some moderation is beginning to take place, but again, it’s likely to be slow before the inflation data starts to show some substantive improvement and that means the Fed continuing with those 50bps hikes most likely past July.

 

  • The market sees a 2.75% fed funds rate at year-end and a 3.00% rate after the Feb. 1, 2023 FOMC meeting.

 

  • This morning, Treasuries are trading around unchanged while equities look to open 200+ Dow points lower on the heels of Powell’s tough talk on rate hikes yesterday.
Weekly Change in Mortgage Applications

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.74 2.97 3.09 3.26 3.52 3.98
0.50 2.72 2.95 3.03 3.15 3.38 3.87
1.00 2.72 2.92 3.00 3.10 3.28 3.74
2.00 2.90 2.94 3.02 3.17 NA
3.00 2.98 3.11 NA
4.00 3.06 NA
5.00 3.02 NA
10.00 NA

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Tags: Published: 05/18/22 by Thomas R. Fitzgerald