Published Date 5/18/2022
US stock indexes in very early trading began lower, interest rates recently have improved when stocks are lower, today the 10 yr. note at 9 am ET +3 bps to 3.00%. After making the point yesterday that when stocks fall interest rates also fall, this morning we have been proven wrong. The strong comments from Chairman Powell yesterday resonating this morning; Powell drove home that the Fed wouldn’t “chicken out” on increasing interest rates regardless of the potential impact on the economy. Made it explicitly clear (if you understand Fedspeak) the Fed will increase the FF rate at a 50 bp pace in the next two FOMC meetings. Once again, the 10 tested and held 3.00% early this morning.
Weekly MBA mortgage applications last week declined 11.0% from the week before, purchase apps -11.9% and re-finance apps -9.5%.
April housing starts and permits at 8:30 am; starts expected at 1.765 mil, declined to 1.724 mil, permits thought to be 1.815 mil did improve to 1.819 mil. March starts revised lower to 1.728 mil from 1.793 mil while permits were revised slightly higher to 1.879 mil from 1.873 mil. Percentage wise starts down 0.2%. The report showed the number of single-family homes authorized for construction but not yet started — a measure of backlogs — rose slightly to the highest level in over 15 years. Overall backlogs climbed to the highest since 1974.
At 9:30 am the DJIA opened -294 after increasing 431 yesterday, NASDAQ -199 from +322 yesterday, S&P -49 from +81 yesterday. The 10 yr. note at 9:30 am 2.98% +1 bp. FNMA 4.5 30 yr. coupon at 9:30 am -8 bps from yesterday and -36 bps from 9:30 am yesterday.
At 1 pm $17B 20 yr. bond auction.
Goldman Sachs Group Inc. Chief Executive Officer David Solomon said clients are preparing for slowing growth and a decline in asset prices — all as “extremely punitive” inflation creates a tax on the economy. He added that he isn’t overly concerned about a recession, saying it’s a 30% chance of such an event in the next 12 to 24 months. He also said the obvious, “Inflation is extremely punitive, especially on those that are living week to week, paycheck to paycheck. It’s a big, big tax on that part of society. I think it’s very, very important that we get it under control.”
More comments: Mohamed El-Erian, the chair of Gramercy Fund Management and former chief executive officer of PIMCO, while the US can perhaps avoid a recession, “what is unavoidable is stagflation,”… “We’ve seen growth coming down and we’re seeing inflation remaining high.” ….“The Fed is finally catching up to developments on the ground,” Stagflation is the “worst thing for central banks, especially for the Fed because it puts its two objectives in conflict with each other,” he said. “This situation was avoidable, had the Fed not stuck to its transitory inflation characterization.” As for how investors should respond, he said they have still to price in a “significant slowdown in growth,” which means there’s more of an adjustment to make.
MBS prices are not much changed from yesterday, but early this morning were down as much as 23 bps when the 10 traded slightly above 3.0%, at 10 am the 10 back below it at 2.96% -1 bp.
Source: TBWS
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