The Market Today

Fed Voters Back Powell’s Pledge to Do Whatever It Takes to Tame Inflation


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Mortgage Applications Slump As Mortgage Rates Hit Highest Since March 2019: applications slid 8.1% in the week ended March 18, matching the second biggest weekly decline in more than a year, as purchase applications slipped 1.5% and refinancing activity sank 14.4%. Purchase applications remain in the bottom half of the 12-month range while the refinance applications index has now reached its lowest level since December 2019. Amid the sharpest weekly rise in the 10-year Treasury yield since September 2019, the MBA’s 30-year fixed mortgage rate posted its biggest weekly increase since March 2020. The 23-bp increase pushed the 30-year fixed rate up to 4.50%, its highest level since March 2019 and furthering concerns about housing affordability (see Chart of the Day).

New Home Sales Expected to Recover Modestly: The Census Bureau will report on New Home Sales in February at 9:00 a.m. CT with economists expecting a modest 1.1% recovery after a 4.5% pullback in January. An as expected result would equate to an annualized sales pace of 810k units, marking the second strongest result in 11 months but well below the strongest levels of the pandemic.

Fed Officials on the Schedule: Fed Chair Powell is participating in a panel discussion on financial innovations. Not surprisingly, considering his carefully-scripted hawkish speech on Monday, Powell has made no new headlines on the monetary policy front. At 10:45 a.m. CT, San Francisco Fed President Daly (spoke on the monetary policy outlook yesterday; more below) will join Bloomberg for an event that is focused away from the outlook for the economy and interest rates. St. Louis Fed President Bullard is scheduled for two separate events later today but is unlikely to surprise markets fully aware of his preferences for much tighter monetary policy. Bullard dissented to last week’s policy decision to raise the fed funds rate by 25 bps, preferring instead to proceed with a half-point hike. Bullard explained his dissent in a paper and has made multiple public remarks since the meeting fleshing out his hawkish preferences to push the target policy rate range up near 3.00% by the end of the year.


OTHER ECONOMIC NEWS

Richmond Fed Index Picks Up But the Outlook Remains Cloudy: The Richmond Fed’s Manufacturing Index recovered more than expected in March after notable weakness to start the year. The 12-point jump outpaced the modest 1-point gain expected and pushed the index up to its second highest level since July 2021. The improved current assessment reflected recoveries across orders and shipments activity, less disruptions within the supply chain, and better readings on the labor market. Despite the pick-up in the current measures, forward-looking indicators were generally softer, potentially capturing the increased uncertainty that has bubbled up in recent weeks amid the war in Ukraine and strong central bank signaling.

Fed Officials Continue to Signal Rate Hikes Ahead, With Voters on Board With Aggressive Path: Several Fed officials agreed Tuesday that it was time for the central bank to ratchet the target rate range higher, but disagreed on the steepness of the path forward. San Francisco Fed President Daly, who doesn’t have a vote on policy decisions this year, said that, “Inflation is far too high. People are thinking about inflation when they get up in the morning and they’re thinking about it when they go to bed at night.” “So that means marching [the fed funds rate] up to neutral and looking at whether we need to go over neutral,” Daly concluded. While Daly said she doesn’t expect the fed funds rate will reach 2.00% by the end of the year, Cleveland Fed President Mester, who will vote at each meeting for the remainder of 2022, disagreed. Mester said that the Fed will need to raise rates to 2.50% by the end of the year, implying at least a couple of half-point hikes at some point, and continue moving rates up in 2023. Echoing Chair Powell’s hawkish sentiment from Monday’s speech and Fed President Bullard’s, also a current-year voter, message from earlier in the morning, Mester called inflation “the number one challenge for the U.S. economy.” New York Fed President Williams didn’t discuss monetary policy in his appearance.


TRADING ACTIVITY

Stocks Rebounded Even as Rates Reached New Multi-Year Highs: Stocks recovered Tuesday on broad strength across most sectors even as Treasury yields continued to climb to new multi-year highs. The S&P 500 rose 1.1% after a small dip Monday and has now gained more than 8% over the last six sessions. Every sector except for energy gained ground, with U.S. WTI inching lower following a three-day surge but holding near a two-week high. Tech shares were near the front of the pack despite the continued upward move in rates that gave a lift to U.S. bank names. While equities’ rise was named alongside higher private-sector debt offerings as forces pushing rates higher, the underlying focus remains on the Fed’s evolving response to inflation. After Fed Chair Powell’s hawkish Monday speech, a couple of current-year voters from regional Federal Reserve Banks said they support Powell’s pledge to tighten policy aggressively to bring inflation down (more above). Fed funds futures were little changed on the day, continuing to price in a year-end effective policy rate around 2.20%. The 2-year Treasury yield rose 4.9 bps to 2.16%, a new high back to May 2019. The 5-year yield rose 7.9 bps to 2.40%, its highest level since April 2019. While the 10-year yield’s 9.3-bp gain steepened the curve between it and the 2-year yield as well as pushed the index above the 3-year yield, its close at 2.38%, the highest since May 2019, kept the benchmark yield inverted to, or below, the 5- and 7-year yields.

Wednesday Brings Calmer Global Markets: U.S. equity futures slipped early Wednesday and Treasury yields finally took a breather as global markets calmed somewhat amid a quieter session for macro headlines. Stocks rose in Asia but fell in Europe as oil prices regained their upward momentum, rising around 3% to push U.S. WTI back above $112 per barrel and Brent closer to $119. Following yesterday’s big gains in the face of further yield increases, U.S. equity index futures followed European indices to session lows before 7 a.m. CT with losses between 0.4% and 0.8%. After initially pushing higher again overnight, Treasury yields pulled back with shorter yields holding tighter to the intrasession reversal. At 7:05 a.m. CT, the 2-year yield was 3.5 bps lower at 2.13% while the 10-year yield had edged 0.4 bps lower to 2.38%, steepening the curve for a second session away from Monday’s 16.99-bp reading which marked the lowest since March 2020.


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