Good Tuesday AM,

The market is improving a bit as Chairman Powell has just finished his speech at the Economic club.

Historically Fed’s have not shared any new information of any importance at these meetings, especially coming out of a recent Fed rate decision. Powell is different lately and he has dropped a few bombs over the last several months at random times. He uses these meetings for a course correction if the market is not doing what he feels it needs to do. Today he shared the markets are reading the Fed right. Likely a few more rate hikes and it may be difficult to bring down inflation quickly with a strong labor market. He was fairly measured and not a hawk about rates at all.

As such, the bond market improving a bit, but it makes sense to be careful. The ten-year note is sitting at 3.63% and at a line in the sand.  If the ten-year breaks above 3.65% and holds there, we will run up and test the upward trend line at 3.75. If that does not hold, 3.90 is a for sure thing. Mortgage bonds are up on the day and are outperforming Treasuries right now. This is an exceptionally light news week leaving us more vulnerable to big technical moves.

I thought it would be a good idea to share a graph on what the ten-year treasury has done over the last few months. The trend is certainly for lower rates.

Household savings has dropped negative and the vast majority of savings collected during the pandemic have evaporated. In 2020 and into 2021, a combination of government pandemic stimulus and reduced spending, for example on restaurants and travel, fattened Americans’ wallets. This cash helped Americans make it through a period of high inflation last year, but the forces that had acted to boost savings reversed direction as pandemic relief unwound and prices soared. Today, some people are having to cut back on their spending or add to their credit-card balances. Many have had to tap their savings to stay afloat, say economists.

And here is a good piece by Bloomberg:

The economy remains incredibly tough to read. I’ve said it in the past, but one reasonable approach to thinking about this moment is to simply take all the big macro trends from 2010 and just turn them upside down. Back then banks were sickly. Today banks are healthy. Back then, tech was booming. These days, tech companies are laying workers off. Back then, inflation was persistently low and the labor market was persistently weak. These days, it’s the unemployment rate remaining stubbornly low, while the inflation number remains close to multi-decade highs. And from a market perspective, back then people used to talk about the “Fed put”, and how every time stocks started to wobble, investors could rest assured that the Fed would soon intervene, and ease policy, helping to put a floor under risk assets. It’s why “Buy The Dip” became the dominant investing strategy of the decade. Of course the flipside of the Fed Put is the Fed Call. When things get good and hot, the risk arises of the Fed stepping in and putting a lid on the activity.

Here’s Bloomberg’s Edward Bolingbroke:

Friday’s stronger-than-expected jobs numbers ignited the jump in front-end yields, while a slide in European bonds further fueled the rise on Monday.

Before the release of the jobs report, traders already were looking at a quarter-point rate hike at the central bank’s next policy meeting in March as a done deal. Now, an increase at the next meeting in May is also looking highly likely, and another in June is being viewed as a possibility too, according to pricing in overnight index swaps. And yesterday, Raphael Bostic of the Atlanta Fed said that Friday’s strong jobs report may cause the Fed to push rates to a higher peak than previously anticipated. In addition to the strong labor data, there are other hints of a cyclical upswing happening in the economy. What’s more, the strength in the data comes as Powell and other Fed officials had been talking about an ongoing slowdown. Speaking of economic data, keep watching housing. This was the one area that had gotten absolutely clobbered (for good reason) by the rapid rate hikes of 2022. Anyway, the Bloomberg Economics US Housing and Real Estate surprise index (which measure the degree to which the housing data is coming in better or worse than expectations) has been sharply climbing. It’s now at its highest level since April 2022, and it’s close to turning positive.

The Fed doesn’t have a “kill the housing market” mandate. But if the one sector that’s most clearly affected by rates is gathering steam again, that may be a sign of more work to be done.

Please remain safe and stay healthy, make today great!