Fed Raises Rates by 0.75 Point, Signals Further Increases
(…) “These rate hikes have been large, and they’ve come quickly,” Mr. Powell said, referring to the Fed’s four consecutive rate increases since March. “And it’s likely that their full effect has not been felt by the economy, so there’s probably some significant additional tightening in the pipeline.” (…)
“Are we seeing the slowdown in economic activity that we think we need?” Mr. Powell said. “There is some evidence we are, at this time.”
Mr. Powell suggested the central bank wasn’t likely to slow down rate increases simply because growth slows. That is because with inflation running well above the Fed’s 2% target, it wants to see economic growth slow below its estimated long-term trend of around 1.8%. (…)
Mr. Powell, who goes by Jay, repeated his view Wednesday that he is more concerned about the risk of failing to stamp out high inflation than about the possibility of raising rates too high and pushing the economy into a recession. (…)
- Powell says he doesn’t believe U.S. is in a recession “There are just too many areas of the economy that are performing too well.”
That was in reply to a question during the presser. Another, very naughty, reporter subsequently asked Mr. Powell how people should feel about this view given his previous forecast of transitory inflation. The chairman kept his poise:
“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook,” he told reporters.
- “We think it’s time to just go to a meeting-by-meeting basis and not provide the kind of clear guidance that we had provided.”
Tough job!
“While another unusually large increase could be appropriate at our next meeting,” that will depend on the data between now and then, the chair said.
Fed Watchers Say Markets Got It All Wrong on Powell ‘Pivot’
(…) Economists pointed out that the Fed’s top focus remains curbing inflation, even if it comes at a cost to employment, the other side of the central bank’s congressional mandate. In addition, Powell cited forecasts in mid-June that showed officials expected to raise rates to about 3.4% this year and 3.8% in 2023 — projections that are above market expectations. (…)
But Powell’s comments were “not the words of a Fed chair who is pivoting towards a dovish stance,” wrote ex-Fed official Perli, the firm’s head of public policy, and Durham, head of global asset allocation.
“The markets clearly think the net of today is that the Fed will end up doing less tightening, but it was hard to come away from the Fed press conference thinking the Fed delivered a dovish pivot,” analysts at NatWest Markets said in a note. “If anything, based on what we heard today, the median Fed member’s view on the path of the Fed funds rate over the remainder of this year could conceivably be higher.”
Nordea:
At the press conference, chairman Powell repeated a number of times that the only job that matters for the FED right now is to get inflation to a path towards 2%. He also repeated that to achieve this, we would need to see a period with weaker economic data and a cooler labour market.
Asked about whether the recent batch of weaker data had shifted the FEDs thinking on future rate hikes, he referred to the June dot-plot as still the most likely path of interest rates going forward. This means still another percentage point of hikes this year, followed by 50bps in 2023.
Measures of financial conditions have tightened markedly since the Fed started hiking, but they are still not in restrictive territory. If inflation starts to come down, it is likely the FED will want to keep financial conditions tight for a prolonged period to make sure price pressures are not emerging again, not repeating the mistakes of the 1970s. We see the current market pricing for several rate cuts in 2023 as unlikely to happen. The market may have lost the confidence in the current hiking cycle, but the FED is a long way from blinking.
Goldman Sachs:
We heard five arguments for slowing the pace in Powell’s comments. First, he endorsed the message from the June dot plot, which is consistent with our 2022 funds rate forecast. Second, he noted that 75bp hikes are “unusually large” and that it will likely become appropriate to slow the pace as policy tightens. Third, he said the full effect of rate hikes has not yet been felt. Fourth, he said the FOMC would react to growth, labor market, and inflation data, in contrast to a more single-minded focus on inflation in some recent Fed commentary. Fifth, he reiterated that the FOMC aims to rebalance supply and demand through below-potential growth, not a recession.
- Investors Love Jerome Powell But is a fed funds rate at 2.5% really ‘neutral’ with inflation at 9%?
By the WSJ Editorial Board:
(…) Prices soared as if tighter monetary conditions won’t last long, and that’s troubling as an anti-inflation message. (…)
Mr. Powell sounded much less hawkish at several points in his hour-long presser. It was especially striking to hear him say that current interest rates are close to “neutral,” meaning they are no longer accommodative. But even after Wednesday’s 75 basis-point increase, the fed funds rate is only 2.25%-2.5%. The inflation rate in June was 9.1%, which means real rates are still decidedly negative.
Mr. Powell also said he thinks rates might not have to increase all that much further, citing the June Fed median forecast of 3.25%-3.5%. Markets had been signaling ahead of the meeting that they believe the Fed will begin cutting rates a year from now. And while Mr. Powell didn’t bless that sentiment, he also didn’t do much to dispel it.
Not to be unkind, but when the fed funds rate was 2%-2.25% in October 2018, Mr. Powell said “we’re a long way from neutral” on interest rates. The inflation rate at the time was a mere 2.5%. Times and circumstances change, but the meaning of “neutral” can’t possibly have changed that much. (…)
But the lesson of the 1970s is that ending the anti-inflation fight too early leads to inflation that falls from its heights as the economy slows but still stays uncomfortably high at a new plateau. Then it rises again as the economy recovers and reaches new heights. Then do it all again, until the tightening medicine has to be far more severe than it would have been had the Fed stayed the course earlier. (…)
- Powell: “There are just too many areas of the economy that are performing too well”
Hmmm… Trying hard to find “too many”:
- housing? certainly not, see below.
- retailing? in recession since March.
- capex? nope, see below.
- exports? still 7.5% below pre-pandemic levels.
- services? maybe, but likely not strong enough to offset.
Mr. Powell keeps talking about employment, a lagging indicator dependent on all the above. He shrugged off the nascent inventory cycle as “technical”. There is nothing technical about it. The necessary inventory correction will compound the economic impact of inflation and tightening financial conditions.
- Ford CEO Farley Says Automaker ‘Absolutely Has Too Many People’ Farley made it clear Wednesday that job cuts are coming. Bloomberg News reported earlier that the company is planning to slash as many as 8,000 salaried positions.
U.S. Pending Home Sales Fall for the Seventh Time in Eight Months in June
The Pending Home Sales Index fell 8.6% m/m (-20.0% y/y) to 91.0 in June after a 0.4% increase in May (+0.7% initially) and a 4.0% decline in April, according to the National Association of Realtors (NAR). The June m/m fall was the seventh in eight months to the lowest level since April 2020. Pending home sales have decreased 25.7% since the October 2021 peak. Purchasing a home in June was approximately 80% more expensive than in June 2019, the NAR reported, projecting that home sales will be falling 13% in 2022 and will begin to increase by early 2023.
Pending home sales decreased in all the major regions of the country in June. Sales in the West worsened 15.9% (-30.9% y/y) after a 4.9% drop. Sales in the South slid 8.9% (-19.2% y/y) following a 0.1% uptick. Sales in the Midwest fell 3.8% (-13.4% y/y) on top of a 2.9% decline. The West, South and Midwest regions experienced the sales decreases for the seventh time in eight months to the lowest levels since April 2020. Sales in the Northeast fell 6.7% (-17.6% y/y), the second m/m decline in three months, following a 15.4% rebound.
The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau’s new home sales data. In contrast, the National Association of Realtors’ existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.
(Another way to look at the same data. 2020 was clearly an aberration, but 2022 is particularly weak:
Yesterday, we learned that U.S. New Home Sales & Prices Decline Sharply in June and that new homes inventory is well above average and about to swell even more given work in progress.
- 20% of builders lowered prices on new homes in July, according to survey data from housing market research firm Zonda. (Axios)
Orders for Big-Ticket Items Rose in June New orders for durable goods—products meant to last at least three years—rose 1.9% in June to a seasonally adjusted $272.6 billion.
New orders for durable goods—products meant to last at least three years—rose 1.9% in June to a seasonally adjusted $272.6 billion, the Commerce Department said Wednesday. The increase was seen across most categories, including motor vehicles and military aircraft. Excluding defense, orders were up a more modest 0.4%. (…)
The data reflect both continued demand from businesses and consumers and rising prices. Orders data isn’t adjusted for inflation, which is running at a four-decade high. (…)
A closely watched proxy for business investment—new orders for nondefense capital goods excluding aircraft—rose 0.5% to $73.9 billion in June compared with the previous month, the Commerce Department said Wednesday. In the first half of the year, so-called core capital goods orders were up 10.1%, versus the same period in 2021.
The business investment proxy is seen as an indicator of the economy’s future direction. (…)
The Commerce Department does not publish capex in real terms. Here’s my rendering of it, deflating nominal capex data with PPI-Capital Goods. Since the January peak, real capex have declined 5.2% annualized. Inflation can hide bad trends…
PPI-CAPITAL GOODS (YoY)
Meta Falls as Sales Miss Estimates in First-Ever Quarterly Drop
- Meta Sees Ad Prices Fall Further Meta, as it reported subdued quarterly results, said the average price per ad decreased by 14% compared with the year-earlier period. Prices were down 8% year over year in the preceding quarter, the company said in April.
The Steady Erosion of Russian Oil Exports Continues Seaborne flows have fallen by 480,000 barrels a day since mid-June
(…) Shipments to China and India are down by somewhere between 15% and almost 40% from their post-invasion peak, according to the ship tracking data monitored by Bloomberg for this story. The final scale of the drop will depend on where almost 4 million barrels of crude on tankers that are yet to show final destinations is discharged. Much may eventually go to Asia.
There’s still a long way to go before a drop in shipments hits the Kremlin’s war chest hard enough to give President Vladimir Putin second thoughts about his invasion of Ukraine. Rising crude prices have boosted Russia’s export duty rates this month, offsetting some of the reduction in flows. While shipments in the week to July 22 fell to their lowest since the week ending March 25, export revenues were the lowest in only four weeks.
CBO Expects Significant Rise in Public Debt Burden, Deficit While the nation’s fiscal picture has been improving this year, CBO projections show the U.S. over the next 30 years will continue to face an increasing budget shortfall and higher debt levels.
(…) The CBO estimates that federal debt held by the public as a share of the economy will rise to 107% in 2031. That level would surpass its historic high and would be up from roughly 98% in fiscal year 2022, which began last October. Debt as a share of gross domestic product will then rise to 185% by 2052, CBO estimates.
The agency projects the federal deficit as a share of the economy will rise from 3.9% in 2022 and reach 11.1% over the next 30 years, driven mostly by increased spending on net interest costs. Outlays on net interest are expected to quadruple by 2052 as persistently large deficits drive increases in federal debt and interest rates rise, CBO said. (…)
EARNINGS WATCH
We now have 182 companies in, a 76% beat rate and a lessened +3.6% surprise factor. These 182 companies reported aggregate earnings down 1.6% YoY on a 8.4% revenue growth rate.
Estimates are for Q2 EPS to rise 6.4%, -3.0% ex-Energy. Revenues: +11.6%, ex-E + 7.0%. Q3e: +9.4%, +3.1% ex-Energy. Q3 revenues: +10.9%, ex-E +7.3%. Sower GDP growth, hopefully slower inflation, but same revenue growth rate!
S&P 500 members with a combined market value of $6.8 trillion will report today, including Apple, Amazon.com, Mastercard, Intel, Honeywell, Pfizer, Southwest Airlines, Comcast and Northrop Grumman.