The Market Today

Growing Belief Fed Should Pivot, but Will Remain Patient Instead

by Craig Dismuke, Dudley Carter


Growing Belief Fed Should Pivot, but Will Remain Patient Instead: The Fed will deliver a critical policy decision today at 1:00 p.m. CT.  Amid growing speculation that the Committee should begin taking steps reducing its easy monetary policies, there is also a general consensus that they will not do so.  According to Mohamed El-Erian’s Op-Ed in Bloomberg this morning, “the answer would be clear: Start reducing exposure to a now more risky posture by moving forward with a partial pivot”.  However, he goes on to speculate, “That is not what is likely to transpire”.  Colliding in today’s decision are 1) an entire overhaul of the Committee’s policy-making framework with the intention of raising longer-run inflation expectations and 2) an economy and accompanying inflation dynamic that have become increasingly risky to long-term price stability. Developments since the Fed reworked its inflation framework and committed to remaining patient with policy rather than acting preemptively, include a much stronger rebound in the economy from the worst collapse since the Depression, significantly more fiscal stimulus than was expected, a faster delivery of vaccines than expected, a quicker improvement in the pandemic situation, and more supply-side constraints than could have been expected.

If the Fed is not yet prepared to make a formal pivot with policy, the key will be in the dots.  Higher dots in the Fed Funds forecasts will indicate a growing number of participants who believe the time is coming to talk about tapering.  Also key will be the Fed Chair’s communications in his post-decision presser (1:30 p.m. CT).  History says market volatility can be significant when investors (collectively) believe the Fed is not seeing the same risks they see.

Mortgage Applications Improve as Mortgage Rates Dip: Mortgage applications for the week ending June 11 rose 4.2% as the 30-year mortgage rate ticked down 4 bps to 3.11% helping lift purchase apps 1.6% and refi apps 5.5%.  Purchase apps have now inched up for two consecutive weeks but remain 21% below their January level.

Housing Starts and Permits Disappoint in May: Housing starts and building permits disappointed in May after lower revisions to previous months’ tallies left the overall level of activity in May below expectations. Housing starts rose 3.6% in May on a 4.2% increase in single family activity and a 2.4% increase in multi-family.  However, April’s 9.5% decline was revised even lower, to down 12.1%.  Building permits fell 3.0% in May as single family activity fell 1.6% and multi-family dropped 5.8%.  April’s building permits data were also revised 1.0% lower from the initial estimate.  Housing remains one of the many key focuses today with homebuyers showing some reluctance to elevated home prices.


Treasury Yields Enter Holding Pattern and Stocks Pause Below Record Levels Before the Fed’s Decision: U.S. equities slipped Tuesday, pulling the S&P 500 and Nasdaq down from record levels ahead of this afternoon’s Fed decision. Eight of the S&P 500’s 12 sectors moved lower Tuesday, while energy, industrials, utilities, and financials found support. Energy led gains among those four groups as crude prices rallied around 2%, sending WTI up to near $72.50 per barrel, a more-than-two-year high. An industry report predicted today’s official EIA data would show domestic crude supplies fell more than 8.5 million barrels last week, which would represent the largest decline since late January. More broadly, data earlier in the day showed solid retail sales continuing, despite a small drop in May, and a somewhat softer tone for manufacturing output last month, even as auto activity picked up. Even less eventful than the equity markets, Treasury yields ended mixed but nearly on top of where they closed Monday. The 2-year yield rose 0.6 bps to 0.16% while the 10-year yield fell 0.2 bps to 1.49%.

Asian markets set a weaker tone for Wednesday’s global session after some softer-than-expected consumer and industrial data from China and a smaller annual gain than was estimated for exports from Japan. Sentiment, however, has stabilized since European trading began, nudging the Stoxx Europe 600 higher by around 0.2%. Not surprisingly, investors in U.S. assets appear hesitant to place any significant wagers ahead of this afternoon’s Fed decision. At 7 a.m. CT, U.S. index futures were mixed around unchanged and Treasury yields were in a holding pattern. The 10-year yield was 0.5 bps lower to 1.487%, marking the largest move of any maturity across the curve.

Industrial Activity Was Softer Than Expected Despite Improvement in Auto Production:
While industrial production rose more than expected in May, a portion of the percentage change above estimates was driven by downward revisions to April’s results. Industrial production rose 0.1% in April, less than the 0.7% gain initially estimated, which makes May’s 0.8% gain less impressive when converted into Dollars, considering the lower base. The manufacturing component rose 0.9%, beating estimates for a 0.8% gain, but also skewed by a downward revision for April from a 0.4% gain to a 0.1% decline. Encouragingly, durable goods manufacturing rose 1.0%, largely supported by a 6.7% increase in production of motor vehicles and parts. Away from manufacturing, mining rose 1.2% while utilities output increased 0.2%.

Home Builder Confidence Drops As Rising Prices Continue to Impact Activity: The NAHB’s Housing Market Index, a gauge of home builder confidence, fell unexpectedly in June to its lowest level since August of last year. The drop from 83 to 81, however, wasn’t a total surprise considering some moderation across housing indicators recently. The group’s chief economist said, “While builders have adopted a variety of business strategies including price escalation clauses to deal with scarce building materials, labor and lots, unavoidable increases for new home prices are pushing some buyers to the sidelines. …Moreover, these supply-constraints are resulting in insufficient appraisals and making it more difficult for builders to access construction loans.” Behind the headline decline, current and future sales expectations and prospective buyer traffic all cooled 2 points.

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