The Market Today
Three Questions for the Dots on FOMC Day
by Craig Dismuke, Dudley Carter
Three Questions for the Dots on FOMC Day: It’s Fed Day (decision at 1:00 p.m. CT) and expectations are convincingly that the FOMC will hike to 2.00%-2.25% (the eighth 25 bps hike of the cycle) and an increase in the monthly portfolio roll-off amount to $50 billion (the expected peak roll-off amount). There may be a change to the Official Statement language, no longer saying that policy remains accommodative. If so, we will consider this to be mechanically accurate rather than a shift in policy stance. More uncertain are the infamous dots which, ironically, Fed officials have downplayed after previous decisions. Investors, however, do not downplay granular analysis of individual sentiment of a policy-making group – specifically the Fed. We will be looking at three things (see Chart of the Day for illustration): 1) Will any of the four members projecting rates will end 2018 at 2.125% raise their projections and strengthen the conviction for a fourth hike this year? 2) Will the first look at 2021 rate projections show Fed Funds plateauing in 2020 at 3.25%-3.50% or will they show the target range rising again, or even pulling back after a 2021 peak? And 3) Will just one of the less hawkish participants raise their longer-run projection brining the median longer-run projection up from 2.875% to 3.00%? All of these answers will determine how the markets perceive today’s FOMC decision.
New Home Sales Expected to Tick Higher: Also released today at 9:00 a.m. CT will be the August New Home Sales report. Sales are expected to tick up 0.5% MoM after falling over 4.0% in the last two months. More broadly, new home sales are now down 12% from their November peak and questions of affordability are plaguing the housing sector now. Some economists specializing in housing have called a peak in existing home sales, but the general consensus is that new home sales will continue to grind higher despite some recent weakness. Existing home sales account for 89.5% of all home sales but new sales are more accretive to GDP growth. Additionally, renovation activity has gone from making up 22% of residential construction activity in 2006 to 43% today. As such, so long as home improvement spending grows and new home sales remain positive, housing could weather the recent affordability storm more effectively.
Mortgage Rates Continue to Rise But New Applications Enjoy Solid Week: Mortgage applications for the week ending September 21 rose 2.9% on a 2.6% increase in purchase applications and a rare 3.2% increase in refi apps, despite mortgage rates ticking up approximately 20 bps from the end of August through the end of September. According to the MBA report, the average 30-year mortgage rate is now up to 4.97% from 4.78% one month ago. Backing away from the week-over-week data, refi apps remain very low and purchase apps are struggling to regain their pace from early-2018.
Yesterday – Yields Crept Up Again as Investors Await the Fed’s Updated Forward Guidance: U.S. assets did very little on Tuesday as investors turned their attention towards Wednesday’s Fed decision. Crude prices held overnight gains to close at their highest levels since 2014. The helped shares of energy companies, which kept the major indices buoyed near the flatline. Financials jumped at the opening bell on the overnight increase in Treasury rates but faded gradually for the remainder of the session. The S&P 500 followed a similar gradually-declining daily trendline to finish down 0.1%. Only three sectors and 38% of companies improved. Utilities and telecoms fell more than 1% on average. The Dow fell a slightly worse 0.3% while the Nasdaq actually rose 0.2%. Treasury yields also ended off their daily peaks but managed to finish higher, in some cases offering the most yield of the cycle. The 2-year yield closed up 0.8 bps to 2.84%, the highest since June 2008. The 5-year yield added the most, ending 1.4 bps higher at 2.98%, its highest since October 2008. After inching close towards its May high of 3.126%, the 10-year yield settled at 3.10%.
Conference Board Reported a Surge in Consumer Confidence: The Conference Board’s Consumer Confidence index torched estimates for September as a surge in future expectations helped lift the overall index. The headline confidence index rose from a revised-higher 134.7 in August to 138.4, easily clearing the expected 132.1, to touch its highest level since September 2000. More optimism about the future drove most of the gains, as the index tracking the present situation only inched higher by 0.3 points. The future expectations index, however, rose a strong 6.0 points. The relative readings (i.e. good versus bad) on what consumers expect from business conditions and employment opportunities saw hearty gains. The share of consumers expecting better business conditions six months from now was the second highest since the early 1990s while those expecting there to be fewer jobs hit its lowest since 2000. The net number of consumers expecting higher incomes did tick down from August, but remained at its second strongest level since 2001. Consumer spending trends have remained solid so far in the 3Q data and the solid indications from the confidence report would support that continuing.