Good Morning on this Terrific Tuesday from your Hometown Lender,
A little economic data today which came in a bit stronger and while not great for our purposes, is not getting much attention.
Three reasons:
- Tensions are rising in the middle east as the US bombs Yemen and threatens Iran, while Israel bombs Gaza and Lebanon. You can see where the price of oil is going…
- The German Parliament passed a budget allowing for deficit spending for, I believe, the first time. Why does this matter? Well, if Germany floats more debt, more supply will push rates higher and what happens there is likely to bleed over to here.
- Saving the biggest point for last, the Fed meeting starts today and ends tomorrow at 11am pacific. All eyes are watching and waiting and waiting and watching to see what Mr. Powell has to say about future policy. No change in rates for tomorrow, but I see May as a real option. If the commentary is dovish, rates will improve.
Speaking on the Fed (from Bloomberg):
Federal Reserve Chair Jerome Powell must perform yet another juggling act this week with the US central bank set to leave interest rates unchanged. On the one hand, he must assure investors that the economy remains on a solid footing, meaning cheaper borrowing costs aren’t required, especially amid sticky inflation.
On the other, he must imply that policymakers are willing to step in if the economy takes a turn for the worse.
While Powell suggested the economy was resilient two weeks ago, the Fed meets on Tuesday and Wednesday as markets express unease with President Donald Trump’s escalating trade war.
- The yield on the two-year note, the most sensitive to the Fed’s monetary policy, has declined almost 60 basis points from a mid-January peak to a trough this month of 3.83%, the lowest level in over five months
- Equity selloff culminated in a 10% plunge of the S&P 500 from its peak.
- Wall Street’s so-called fear gauge — the VIX — at one point last week climbed to the highest levels since August
“Powell needs to give some sort of a signal that they’re watching it,” said Dominic Konstam, head of macro strategy at Mizuho Securities. While the Fed chief will likely make it clear that officials don’t target the stock market, they can’t ignore the recent slide, he warned. Traders now see a high probability of three rate cuts this year, most likely beginning in June. Economists generally forecast two reductions, similar to what they expect policymakers’ updated projections to show this week. Officials are expected to also slightly downgrade their forecasts for growth this year and bump up their outlook for core inflation, which excludes food and energy.
Powell will likely avoid guarantees that the Fed will spring into action at the first signs of a faltering economy without a key caveat: inflation sustainably moving toward the Fed’s 2% goal.
Wall Street strategists will also be keen for any hints on the Fed’s plans to pause or further slow the speed at which the central bank is reducing its balance sheet — a process known as quantitative tightening, or QT (this part would be key to lower rates).
“The argument for March is that the Fed has already talked about it,” said Blake Gwinn, head of US rates strategy at RBC Capital Markets. “So why not just do it — as they can pause QT and then just restart it later.”
Stay safe and make today great!