We heard from Bullard soon after the last FOMC meeting that he wants another rate hike, though he doesn’t vote. Cleveland Fed president Loretta Mester, also a non voter, last night said she wants to raise rates again too. Also, while the December fed funds contract is today yielding 4.28%, up 5.5 bps (on the quote I’m about to give), thus assuming rate cuts in the back half of 2023, Mester said “Can I come up with scenarios that would have the Fed cutting rates? Yes. Is it my modal forecast? No.” She also expressed her confidence in the US banks, saying “The US banking system is sound and resilient.”
There was a nuance though she gave by saying she wants “the real fed funds rate staying in positive territory for some time.” So if the inflation rate continues to fall, they would have room to cut, if need be, as long as the ‘real rate’ was positive, I say. Also, with credit tightening that is now just accelerating, I’m not sure of the need to raise rates again as the banks and capital markets are tightening for the Fed. From here, it doesn’t have to be a further rise in the cost of capital that squeezes the economy, it is now also the more limited access to capital.
While the average 30 yr mortgage rate fell another 5 bps to 6.40%, mortgage apps fell after 4 weeks of gains. Purchases fell 3.5% w/o/w and down by 35% y/o/y. Refi’s dropped 5.4% w/o/w and lower by 59% y/o/y. I’ve included a chart here of the spread between the Bankrate daily mortgage rate (which is about 30 bps higher than what the MBA said) and the 10 yr US Treasury yield so you can see the rise in spread and why mortgage rates haven’t fallen more with the 10 yr yield down to 3.36%.
While the RBA took a pause on their interest rate increases, the Reserve Bank of New Zealand got more aggressive, hiking by 50 bps to 5.25% where the consensus thought they would raise by 25 bps. They said “The Committee agreed that the OCR (Official Cash Rate) needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term. Inflation is still too high and persistent, and employment is beyond its maximum sustainable level.” The Kiwi initially spiked on the news but is now down on the day vs the US dollar as this is still likely the last major hike by the RBNZ. The 2 yr yield though is up by 12 bps.
Singapore’s March PMI bounced back above 50 at 52.6, up 3 pts m/o/m. S&P Global said “This was underpinned by higher demand for domestic goods and services, in addition to a strong upturn in business activity. That said, export weakness was evident in March, which will be worth monitoring going forward. The improvement in demand meanwhile turned it into a sellers’ market with output price inflation climbing while input cost inflation eased. Sentiment among firms were also lifted with confidence at its highest level since last October.” We remain bullish and long on Singapore stocks.
India, another Asian bright spot, saw its services PMI slip to a still high 57.8 from 59.4.
The Eurozone March services PMI was revised down to 55 from the first print of 55.6 but that is still up from 52.7 in February, 50.8 in January and under 50 in the 5 months prior. The strength m/o/m came not from Germany and France but from Italy and France. I did my part last week to help the Italian economy, particularly its restaurant industry.
The UK services March PMI was left little changed at 52.9 from its initial read and that compares with 53.5 in February and 48.7 in January. We know energy relief this winter was a major relief to both households and businesses even with the subsidies.