A relatively calm day for markets after a volatile week

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Published Date 4/22/2022

Selling continued this morning in MBSs and treasuries. Yesterday Fed chair Powell made it clear that the May FOMC meeting will end with a 50 bp increase in the FF rate. It was largely anticipated for weeks as yields rose, and Fed officials continued to ratchet up the reality in their various speeches. Powell outlined his most aggressive approach to taming inflation to date, potentially endorsing two or more half percentage-point interest-rate increases while describing the labor market as overheated. He said demand for workers is “too hot -- you know, it is unsustainably hot.” Finally, the Fed has been pushed into a corner after a year of wishful thinking about inflation cooling, supply chains easing and fearing a soft landing for the economy was going to be difficult. Inflation shows little signs of abating although the rapid monthly increases in inflation are likely to slow moving forward.

After Powell’s bearish comments yesterday, the expected reactions are presently thinking four 50 bp increases this year. Money markets are pricing in 200 basis points of tightening by the Fed’s September decision, according to interest-rate swaps. That implies a half-point hike -- unheard of since 2000 -- in May, June, July, and September to take the upper bound of the federal funds rate’s target range to 2.50%. The swap market is fluid and swings wildly at times, but at the moment the outlook is quite bearish for the economy if those predictions hold. James Bullard, St. Louis Fed and the FOMC’s leading hawk is starting talk of a possible 75 bp increase may be needed; Mary Daly, San Francisco Fed, normally a dove at the Fed also chimed in agreeing that 50 bp increases are likely. The Fed blew it, keeping interest rates low for too long in the face of rising inflation, now the economic outlook looks increasingly soft going forward.

So far Q1 earnings reports have beaten expectations, keeping the stock market from facing what is coming as the economic outlook is softening. After the earnings are digested the stock market is vulnerable to declines. Of the 98 S&P 500 companies that have reported quarterly results so far, more than 79% have beaten estimates for profit and 65% have surpassed sales forecasts. Positive surprises are seen in all industry groups, underpinning a broad-based recovery. Powell is hoping for a soft economic landing, 200 to 250 bp increases in Fed Funds rates makes that hope difficult to accept.

At 9:30 am ET the DJIA opened -224, NASDAQ +10, S&P -15. 10 yr. at 9:30 am 2.94% +9 bps. FNMA 4.5 30 yr. coupon -25 bps from yesterday and -41 bps from 9:30 am yesterday.

Next week leads into the FOMC the following week, (May 4th). The FOMC will get the most recent inflation readings, March PCE (personal consumption expenditures) next Friday. Beginning next Tuesday, the economic calendar has a lot to digest; durable goods orders, new home sales, inventory data for retail and wholesale prices, April consumer confidence index, March pending home sales, Q1 GDP, personal income and spending, Q1 employment cost index, U. of Michigan April consumer sentiment index.

Source: TBWS

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