The Market Today
Post-FOMC Fed Communications Begin
by Craig Dismuke, Dudley Carter
Fed Communications – Governor Waller Believes FOMC Should Consider 50 BPS Hikes: Also on the calendar today are three Fed officials: Minneapolis’s Kashkari (NV), Richmond’s Barkin (NV), and Governor Bowman (V). Fed Governor Waller (V) is on CNBC this morning and says that he favors front-loading this year’s rate hikes. He noted that the data currently “screamed” for a 50 bps hike but the geopolitical uncertainty led to a 25 bps hike. He believes the Committee should consider 50 bps hikes at the next couple of meetings and that rates should be slightly above neutral (2.375% – 10 hikes or more) by the end of 2022.
Existing Home Sales and LEI: February’s Existing Home Sales report is expected to show a 6.2% MoM pullback after an even-larger gain in January. The pace of existing sales continues to be limited by available inventory. Higher mortgage rates are likely to begin weighing on activity, particularly given the meteoric rise in prices and already-reduced affordability. February’s Leading Index is expected to improve 0.3% MoM after falling 0.3% in January.
OTHER ECONOMIC NEWS
Manufacturing Output Improves Despite Another Decline in Auto Output: Industrial production rose 0.5% in February, matching expectations, as manufacturing posted another solid monthly increase that helped cushion against a reversion of utilities output following a January surge. Manufacturing output rose 1.2% last month on broad improvement across sectors, edging out expectations for a 1.0% gain. Auto production, however, fell 3.6% and for a third month, cutting into some of the gains made late last year and still down more than 10% from its pre-pandemic level from February 2020. Excluding the drop in auto production, manufacturing output rose 1.5%. Utilities output fell 2.7% following a record 10.4% surge in January amid unseasonable swings in average temperatures across much of the country around the turn of the year. Electricity usage slipped 0.9% while natural gas output slumped 12.1%. Overall industrial capacity utilization rose from 77.2% to 77.6%, its highest level since March 2019.
Treasury Yields Pull Back, Equities Extend Rally: Stock investors appeared to have no second thoughts about Wednesday’s post-Fed rally and seemed unperturbed by Russia dismissing the notion that peace talks with Ukraine were making progress. The S&P 500 rallied sharply after the Fed raised rates Wednesday, closing up more than 2.2% at session highs even after officials disclosed more hawkish projections for the equivalent of a quarter-point rate hike at each of the remaining meetings this year. The index stuttered early Thursday but regained its upward momentum just before lunch, rising steadily in the afternoon to close up 1.2% at session highs. While every sector rose, energy companies were the clear outperformers as oil prices rebounded sharply by more than 8%. U.S. WTI rose back above $103 per barrel after a steady slide in the prior seven sessions cut prices from a peak of $130 to around $95. A spokesperson for Russia’s Kremlin said reports of progress towards peace with Ukraine were “wrong” and tensions between Russia and the West continue to grow. Despite equities’ optimism, Treasury yields finished the day modestly lower. Yields had declined overnight, falling further after the Bank of England raised rates at a third consecutive meeting but sounded less aggressive about additional future tightening, sending U.K. yields, particularly on the short end, tumbling. After fluctuating for the remainder of the day, the 2-year Treasury yield fell 2.4 bps to 1.91%, the 5-year yield fell 3.7 bps to 2.14%, and the 10-year yield slipped 1.4 bps to 2.17%. The 7-year yield closed at 2.19%, finishing above the 10-year yield for a sixth consecutive session.
Yields Mixed and Stock Futures Fall, Both on Track for Large Weekly Gains: U.S. equity futures and longer Treasury yields both pulled back overnight but remain on track for sizeable weekly increases thanks to big moves in previous days. S&P 500 futures were roughly 0.7% lower at 7 a.m. CT, indicating the index may struggle to extend its strong three-day gain. However, its 4.9% weekly gain through Thursday puts it on pace to potentially have its best weekly performance since November 2020. The sharp uptick in equities this week occurred despite no real evidence of progress towards peace in Ukraine; the Fed’s first rate hike since 2018 and a hawkish projection for more to come; the Bank of England’s third consecutive rate hike; and concerns about new virus outbreaks in China and eastern Asia and a reversal of the downtrend for infections in Europe. The broad uncertainty has kept a soft cap on longer Treasury yields. After spiking to a new cycle-high following the Fed’s Wednesday decision, the 10-year yield has settled back down, slipping 1.2 bps Friday to 2.16%. The 7-year yield continues to trade above the 10-year yield, holding at 2.18% Friday, and the 5-year yield continues to creep closer, essentially flat this morning at 2.14%. The 2-year yield inched 1.4 bps higher to 1.928%, just shy of Wednesday’s post-Fed close of 1.9379%, its highest since May 2019.