- Markets wait to see if Powell at today’s FOMC meeting will reiterate his opposition only to “disorderly” marketsÂ
- Housing starts expected to edge lower but remain generally strong
Markets wait to see if Powell at today’s FOMC meeting will reiterate his opposition only to “disorderly” markets — The FOMC today concludes its 2-day meeting. The FOMC today will provide an updated Summary of Economic Projections, which will include a new Fed-dot forecast for the funds rate.
The main issue is whether Fed Chair Powell, at his press conference this afternoon, will reiterate his view that he would only be worried about higher T-note yields if the move becomes “disorderly.”
Fed Chair Powell, on March 4, said that the recent yield surge “caught my attention.” He also reiterated that the Fed is a long way from reaching its policy goals of full employment and an average inflation rate of 2.0%, suggesting that there is currently no end in sight for the Fed’s near-zero target rate or the $120 billion per month QE program.
However, Mr. Powell also said, “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threaten the achievement of our goals.”
The markets had been hoping at the time that Mr. Powell would voice some opposition to the surge in yields, as ECB officials have done with their words and their announcement last week that the ECB will boost bond purchases in its PEPP QE program. The ECB, at its policy meeting last Thursday, said that its bond purchases in Q2 will be “conducted at a significantly higher pace than during the first months of this year.” ECB President Lagarde said in her press conference, “Increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy. This is undesirable.”
The 10-year T-note yield so far this year has risen by a net +71 bp to 1.62% from the end-2020 level of 0.91%. That rise in yields has been caused mainly by (1) the emergence of effective vaccines and expectations for the pandemic to end and for the economy to fully recover, and (2) massive stimulus measures. The U.S. government approved a $900 billion aid program at the end of December and an additional $1.9 trillion program last Thursday.
The Fed has been unwilling to challenge the surge in T-note yields because it views that surge to be the result of a “good” cause, i.e., that the U.S. economy will fully recover. The Fed already has a massively stimulative monetary policy with its near-zero interest rate and its $120 billion per month QE program. The 10-year T-note yield is still well below the pre-pandemic levels, which means T-notes yields are still extremely low from a historical perspective.
The Fed today will release a new Fed-dot forecast for the federal funds rate, which could easily be more hawkish than the last forecast. The last Fed-dot forecast, released in December, showed that the majority of FOMC members are predicting an unchanged funds rate target of 0.00%/0.25% over the next three years. However, there was one dissenting FOMC member predicting a +25 bp rate hike in 2022. For 2023, there were five dissenters, with three members predicting a 25 bp rate hike, one predicting a 50 bp rate hike, and one member predicting a 100 bp rate hike.
For the longer-term, the consensus among FOMC members is that the funds rate will settle near 2.5%. That indicates that the Fed, over the longer-term, expects to push its funds rate target up by nearly 250 bp from the current effective rate of 0.07%.
The Eurodollar futures curve indicates that the market is now fully discounting a +25 bp rate hike near the end of 2022. The market is discounting an overall rate hike of +250 bp to the Fed’s longer-term target of 2.50% by 2029.
The T-note market also remains concerned about when the FOMC might begin to taper its QE program. In early January, there were several FOMC members that started mentioning QE tapering in their public comments. However, the Fed as a whole doused that speculation, and Fed Chair Powell finally came down firmly with the statement that it is too early for the Fed to even consider tapering its QE program. The tapering discussion in the market has since died down, but could quickly re-emerge when the end of the pandemic comes closer and the economy comes closer to a full recovery.
Housing starts expected to edge lower but remain generally strong — The consensus is for today’s Feb housing starts report to show a small decline of -1.0% to 1.564 million, adding to January’s -6.0% decline to 1.580 million. While the series is backing off a little from December’s 14-year high of 1.680 million, U.S. housing starts, in general, remain very strong.
The increased demand for new homes could fade next year as the pandemic dies out. Also, the 30-year mortgage rate has risen by +40 bp to the current level of 3.05% from January’s record low of 2.65%.
However, homebuilders are currently very confident and see plenty of pent-up demand. New home sales remained very strong at 923,000 in January, just moderately below last July’s 14-year high. Also, the supply of new homes available for sale remains very low at 4.0 months, which is well below the 5-year average of 5.4 months.
U.S. homebuilder stocks continue to perform well. The SPDR S&P Homebuilder ETF (XHB) is currently up +16% on the year, which is a much better performance than the +5.5% year-to-date gain in the S&P 500 index.
