What are you most afraid of? That is the question before the house of the Federal Reserve and the 18 people that oversee the decision making there (19 if Brainard was still there). With rate hike odds as of this writing at 88% of a 25 bps hike according to the fed funds futures we know the market is betting that the Fed is most afraid of inflation and secondarily concerned with the US banking system which Powell will I’m sure tell us how resilient it is at the press conference.
The Fed should do nothing today however. When they hike rates they are trying to discourage and disincentivize households and businesses to borrow by making it more expensive, just as they try to achieve the opposite when they cut. The more they hike, the more it expensive it gets and the less borrowing takes place. While another rate hike will further dissuade the rest of us to borrow, they must now look at the supply side of this equation. Can they not assume that the credit supply chain has been damaged? It certainly has been which also will mean less borrowing if there are less willing lenders. And it’s not just with the banks of any size, it seems that every day I’m reading about some capital markets credit deal that is getting postponed, whether ABS, high yield, etc… due to ‘current market conditions.’ When was the last time we had an IPO? Thus, we’ve essentially have had a rate hike or two over the past few weeks.
Now things may calm in coming weeks and what the Fed and Treasury are doing in response to these bailouts (both direct and indirect via the BTFP) could end up being inflationary but that is why there is always another Fed meeting ahead. This doesn’t have to be always all or none for monetary policy which it has seemingly been over the past 20+ years whether they are all in on easing or a straight line on tightening until they are done. Showing some flexibility now, again knowing there is always another meeting that they can hike at, would go a long way.
And to the worry that if the Fed doesn’t hike today, they must know something we don’t and if they are worried, the rest of us should be, well that is why Jay Powell has a press conference so he can explain and give color to his concerns. We’re big boys and girls, we can handle the truth from him. The irony of all this with the US banks is that historically it’s a recession that drives trouble for the banks. This time it’s the banks holding of risk free bonds that could lead to the recession.
That said, commercial real estate is a real problem too and I don’t think the Fed appreciates that years of easy money that encouraged so much borrowing in not just CRE but many other things and becomes a toxic situation for those that need to refi in 2023. Make sure to read today’s WSJ article titled “Commercial Property Debt Creates More Bank Worries.” It said “Smaller banks hold around $2.3 trillion in commercial real estate debt, including rental apartment mortgages, according to an analysis from data firm Trepp Inc. That is almost 80% of commercial mortgages held by all banks…This will be critical because about $270 billion in commercial mortgages held by banks are set to expire, according to Trepp, the highest figure on record. Most of these loans are held by banks with less than $250 billion in assets.” //www.wsj.com/articles/commercial-property-debt-creates-more-bank-worries-b36184ba
Bottom line, this is the most over hyped Fed meeting I can remember and I actually think it could end up being a complete non event, notwithstanding all the drama, because either way, whether they hike 25 bps or not, the Fed for now is done raising rates.
Christine Lagarde, because they have their deposit rate at only 3% with inflation running hotter than in the US, she’s even more stuck but because she really believes in the health of the regions banks, she spoke tough again today on inflation. “Bringing inflation back to 2% over the medium term is non-negotiable. We will do so by following a robust strategy that is data-dependent and embeds a readiness to act, but that does not entertain trade-offs around our primary objective.” European bonds are selling off in response. The German 2 yr yield, after jumping by 26 bps yesterday, is up another 7 bps today to 2.69%, though well below the 3.34% it was at two weeks ago. The euro is stronger.
The Bank of England is in a tough place too ahead of their meeting tomorrow because the UK saw today a 10.4% y/o/y CPI print, up from 10.1% in January and 5 tenths above the forecast. The core rate accelerated to 6.2% from 5.8%. They’ll likely hike 50 bps tomorrow to 4.5%.
Here are some notable quotes from last night’s Nike call:
“Our growth this quarter was broad based across our brands, channels and geographies…North America, EMEA and APLA, all delivered double-digit revenue growth. Greater China grew 1% despite a very challenging December following the shift in the country’s Covid policies.”
“And we’re making great progress on inventory, with our inventory dollars down sequentially vs last quarter.”
“SG&A grew 15% in Q3 primarily due to wage related expenses, variable Nike direct costs, and increased demand creation expenses.” Revenue growth btw was up 14% y/o/y.
“To date, we continue to see uniquely strong consumer demand as our product innovation, brand storytelling, and consumer connections drive distinction and growth in the marketplace. That being said, we are closely monitoring the building pressure on consumer confidence and the uncertainties of the macro environment. We continue to take a cautious approach in planning our business, leading with intentional financial and operational guardrails.”
With the average 30 yr mortgage rate dropping to 6.48% (even though Bankrate says it’s 6.94% as of yesterday), purchase apps rose 2.2% w/o/w, though still down 36% y/o/y. Refi’s rose by 4.9% w/o/w but down 68% y/o/y.
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Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.