It’s possible that today’s FOMC statement and follow up press conference ends up being a non event because the bond market has already priced in about 7 rate hikes of 25bps each. The December 2022 fed funds futures yields 1.76% and the January 2023 is at 1.835%. Thus, if Powell wants to regain any shred of credibility he will be hawkish after the 25 bps rate hike today which will take the fed funds to a range of still only .25-.50% less than a week after CPI printed 7.9%. But hawkish as stated has been priced into the short end already. Even if he mentions again (as he did a few weeks ago at his semi annual coffee talk) that he could hike by 50 bps at a meeting, as he wants to flaunt now that he’s serious about containing inflation, it might not change where the December fed funds trades at as the destination might still be the same result. On QT, I doubt whether we’ll get details on the pace and timing of that yet as Powell has hinted that it might come instead in either May or June but I’m sure he’ll talk about.
With no central bank FX reserve safe anymore when denominated in someone else’s currency and gold the only truly safe holding, the monthly US Treasury International Capital data will become ever more important to watch to see if foreigners start lightening up on US Treasuries and start parking some of this money elsewhere. When reported it is somewhat dated so we’ll have to be patient to see the post invasion stats. Last night the January numbers came out and foreigners bought a net $74.4b of US notes and bonds. This follows buying of $81.2b in all of 2021 after six years of large net selling on balance. A lot of that money though might have come out of US stocks as the stock market selloff in January resulted in foreign net selling of US stocks of $50.1b. Japan and China, the two largest holders of US Treasuries added to their holdings. Europe in the aggregate too was a net buyer. Bottom line, the coming few months and quarters will be really important to watch, especially as the Fed is no longer adding to its balance sheet and soon will be shrinking it.
Thanks for the reminder from my friend David Rosenberg who posted this yesterday, it is the updated Fed’s flow of funds chart highlighting household net worth as a percent of disposable income. It is the ultimate visual of the asset price inflation the Fed helped to stoke relative to the actual economy, with disposable income the proxy. At the end of Q4 it reached 825% vs 650% in Q4 2006 at the peak of the housing bubble and was at 615% in Q1 2000 as tech stocks reached its epic top. This is the asset price bubble that the Fed created and is now tightening into. We wish them luck on slowing consumer price inflation without putting a pin in asset price inflation and the economy.
Net Worth as a % of Disposable Income
I said yesterday that the waterfall decline in the Hang Seng index usually typifies the end of a bear market fall and we’ll see if that’s right after a meeting of China’s financial policy committee led by Vice Premier Liu He that resulted in some conciliatory comments in a statement about markets and the regulatory quagmire they’ve put big tech through. The Hang Seng rallied by 9% and the H share index spiked by 12.5%. The Hang Seng tech index was up by 22% and got back the selling of the prior two days. When looking out in coming years, I remain very bullish on many Asian markets and plenty of babies in Hong Kong were thrown out with the bath water too.
Maybe this story from Reuters sharpened their minds on the regulatory nightmare that they’ve put their most successful tech companies through. According to sources, “Alibaba and Tencent Holdings are preparing to cut tens of thousands of jobs combined this year in one of their biggest layoff rounds as the internet firms try to cope with China’s sweeping regulatory crackdown.” In that policy statement it did say that this crackdown should be done “as soon as possible” and that regulation “should be standardized, transparent and predictable.” Predictable it certainly hasn’t been. It also said they are working towards an agreement with US authorities and meeting the US listing rules. We’ll see.
Also helping the mood, Foxconn was allowed to reopen its Shenzhen facilities as long as they create a bubble type environment.
The average 30 yr mortgage rate jumped to 4.27% according to the Mortgage Bankers Association, up from 4.09% last week and 4.15% in the week prior. Refi’s fell 2.8% w/o/w and are down 49% y/o/y in response. Purchases though hung in there as they were up a touch, by .7%, though are still down 8.4% y/o/y. With sharp home price gains and now the jump in mortgage rates, affordable challenges become ever more a problem.
But, if you want to go rent a single family home instead, you’ll have to pay up by 12.6% y/o/y according to CoreLogic’s Single Family Rent Index which was out yesterday. Rent growth in Orlando was 20% and in Phoenix prices jumped by 19%.
Japan said its February exports rose 19.1% y/o/y, which was close to the estimate of up 20.6%. Imports jumped by 34%, well more than the forecast of up 26.4% and we can blame the ever more expensive energy imports they need at the same time the yen is weak. This data is pre war. The Nikkei rallied by 1.6% overnight and JGB yields ticked higher.