May 3, finally.
The date seems circled on your calendar forever. Actually since March 22nd, but that still seems a long time to me. This afternoon, the FOMC is expected to raise the committee’s target range for the fed funds rate for the tenth time in this tightening cycle. This will increase that range to 5% to 5.25%.
Currently, futures markets, which trade in Chicago, are pricing this hike as the last of said cycle and anticipating an 80% chance of a first rate cut on September 20th. That’s a meeting earlier than when these markets were pricing in that first rate cut earlier this week. These futures markets have also reduced the probability of an 11th rate hike to 0% on June 14th.
What will the Fed do next? Perhaps we should focus on the present and the near future. I’m not sure even those who make up the rate setting committee are confident. At least not enough of it to be able to make a forecast set in stone. What is apparent to all is that the economy has slowed and continues to slow but is still growing. What is also clearly seen is that inflation has slowed, but not enough. Not nearly enough.
Those tasked with setting monetary policy for our nation must draw on their dual mandate for guidance. The Fed as a group wants to remain data dependent on decisions that affect many. How to reconcile price stability with full employment. Because the only real instruments in the fight against increased consumer price inflation are a higher interest rate regime coupled with a reduction in the money supply. This leads, at least in one silo, to a higher valuation of the US dollar relative to the greenback’s other reserve currencies, while hurting aggregate domestic demand at both the producer and consumer levels.
From the Fed’s perspective, they probably feel that there are still some significant starting avenues on the full employment side. This Friday, the BLS is expected to release an April jobless rate of 3.6%, versus 3.5% for March. Historically, central bankers have considered anything close to 5% “full employment”. This economy hasn’t seen 5% unemployment since 2021.
Is this 3.5% unemployment rate legitimate? Ongoing jobless claims remain above pre-pandemic levels, as does labor force participation, thanks in part to abusive fiscal policies. Labor force participation improved to 62.6% in March. Before the pandemic, participation was 63.3%, and if you go back to before the GFC (Great Financial Crisis), a ’66 hold was the norm.
What do I say?
We say the Fed is in a bind. Obviously, a number of Fed officials who remain hawkish don’t have the confidence that I and a number of other economists have in the lagging effects of already tightening monetary conditions. Even if the FOMC pulled out today, I think conditions would continue to tighten. In fact, the Chicago Fed’s National Financial Index shows conditions are now looser than they were at the end of March. This would be due to the central bank’s response to the regional banking crisis, which led to increased liquidity. Nevertheless, this index shows the framework conditions to be much tighter than in February. Surviving banks will curb credit creation themselves.
Seriously I ask… how do policy makers stay data dependent when they think the data warrants a continued anti-inflation confrontation when we know the labor market has only just begun to show the weakness it is capable of since the lagging effect of past policy decisions is likely to be around six to nine months behind, and knowing that rising short-term interest rates will only exacerbate the problem of creating a net interest margin in the regional banking space? These banks are being forced to reduce their own potential for success to try and compete for cash deposits… just to remain viable.
I think readers already know that if I had been asked for advice (which I didn’t), I would have already recommended pausing the use of short-term interest rates to fight inflation while concurrently reviewing past rate hikes and the Fed’s quantitative tightening program to allow magic, showing caution in aggravating already damaged conditions in the banking sector and in keeping current employment conditions as close as possible to where they are now.
Wage growth has already fallen off a cliff. That might be all the damage the public can take right now. Putting individuals out of work will not only slow economic activity, which the Fed wants, but will also increase the burden on the state. If you haven’t noticed, the “condition” is already far beyond their depth.
Wednesday kid
It has often been said that Tuesday’s child is full of grace. In this case, “they” might be talking about Tuesday afternoon, when stock markets bottomed about half an hour before noon on the east coast. Was it the fear of higher interest rates? Fear of further problems in the regional banking environment? Maybe it was just a plain old fear of a recession. Regardless of the reason, 10 of S&P’s 11 sector-specific SPDR ETFs closed lower on Tuesday, led by Energy (XLE) and Financials (XLF).
The Energy SPDR fell 4.35%, while WTI Crude itself lost 5%. FYI… Crude Oil continues to sell off overnight. The Financials SPDR slipped 2.27% on Tuesday, while the KBW Bank Index took a hit of 4.31% and the KBW Regional Banking Index fell 4.81%.
The KBW Regional Banking Index is now down 33% since early February and 28% since collapsing in the second week of March. The broader indices weren’t hit quite as hard as these two sectors. At least that was the case after a mild rebound in the afternoon that allowed the S&P 500 to close 1.16% and the Nasdaq Composite 1.08% lower.
The losers narrowly beat the winners 4 to 1 on the NYSE on Tuesday. This is where it gets scary. The increasing volume accounted for only a 16.5% share of NYSE-listed composite trade as total NYSE-listed trade increased 35.1% on the day. What does that mean? It simply means that the pros ran for the hills a day before the Fed and for the most part took profits and losses just to reduce risk.
On the Nasdaq, the selling was less reckless. The losers beat the winners about 5 to 2. The rising volume accounted for 34.4% of the composite Nasdaq-listed trade as total Nasdaq-listed trading volume rose 6.4% day-to-day. That means traders have been less keen on abandoning some of the tech names that have either just been reported or are about to.
In that spirit, Sarge name Advanced Micro Devices (AMD) posted solid earnings Tuesday afternoon, but with mixed to soft guidance. The name traded about 6% lower overnight. Readers know that I trimmed this position ahead of earnings season. I did not further reduce my long position overnight. I haven’t decided yet where to add what was sold back to my core position.
treasuries
The real action, as if the action in the stock and energy sectors wasn’t enough, took place in the Treasury markets. Traders aggressively bought US Treasuries on Tuesday. The US 10-year bond yield fell 15 basis points to 3.43%, while the US 2-year bond yield fell 16 basis points to 3.98%. I see these two returns this morning at 3.40% and 3.94%, respectively, suggesting there may still be room for demand for these products.
The spread between the US three-month T-bill and the US two-year bond, historically the most accurate indicator of an economic contraction available to us, hit another decade low of -180 basis points on Tuesday. oh joy
Business (All Times Eastern)
07:00 – MBA 30 Year Mortgage Rate (Weekly): Last 6.55%.
07:00 – MBA Mortgage Applications (Weekly): Last 3.7% w/w.
08:15 – ADP Employment Report (Apr): Expected 146K, last 145K.
09:45 – S&P Global US Services PMI (Apr-rev): Flashed 53.7.
10:00 – ISM Non-Manufacturing Index (April): Expected 51.8, Last 51.2.
10:30 – Oil Stocks (Weekly): Last -5.054M.
10:30 – Gasoline stocks (weekly): Last -2.408M.
the fed (All Times Eastern)
14:00 – FOMC policy decision.
14:30 – FOMC press conference.
Today’s result highlights (consensus EPS expectations)
Before the opening: (CVS) (2.10), (EL) (.50), (KHC) (.60), (YUM) (1.13)
After closing: (ALB) (7.05), (QRVO) (.13), (WMB) (.49)
(The Energy Select Sector SPDR Fund is an investment of the Action Alerts PLUS Members Club. Want to be notified before AAP XLE buys or sells? Learn more now.)
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