Morning Report: Awaiting the Fed

Vital Statistics:

Stocks are flattish as we await the Fed decision. Bonds and MBS are down.

The Fed decision is due at 2:00 pm today, and Jerome Powell will hold a press conference afterward. The Fed Funds futures overwhelmingly see the Fed maintaining the current Fed Funds range of 5% – 5.25%. The consensus seems to be the Fed will do a hawkish pause, meaning they will skip hiking this meeting and leave the door open for another hike in July. We probably aren’t going to get an all-clear signal out of them.

The dot plot will be the focus for the markets. The March dot plot showed the majority of members saw the end-of-2023 Fed Funds rate in the current range. There were a few members who thought rates could go higher. I wouldn’t be surprised to see the economic projections revised as well, especially GDP which was forecast to rise 0.5% this year. With Q1 coming in at 1.1% and the Atlanta Fed GDP Now Index seeing a 2.2% increase in Q2, the economy would have to fall off a cliff to make that 0.5% forecast. The unemployment forecast of 4.5% is probably too high as well.

We got another benign inflation report with the Producer Price Index declining 0.3% in May. On a YOY basis, the index rose 1.1%, which is below the Fed’s target rate for inflation. If you strip out food, energy and trade services, the index was flat in May and up 2.8% on an annual basis. About 60% of the decline in the headline number was due to lower gasoline prices.

Mortgage applications rose 7.2% last week as purchases rose 17% and refis increased 6%. “Mortgage rates declined for the second straight week, with the 30-year fixed rate decreasing to 6.77 percent. Mortgage applications were up over the week, but remained well below levels from a year ago,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Rates that are still more than a percentage point higher than a year ago, and low for-sale inventory continue to constrain homebuying activity in many markets. The average loan size on a purchase loan decreased for the third straight week, as we continue to see more first-time homebuyer activity in the purchase market. Refinance applications accounted for less than a third of all applications and remained more than 40 percent behind last year’s pace. Elevated rates have reduced the benefit of a rate/term refinance for many borrowers and continue to discourage cash-out refinances as borrowers are unwilling to give up their lower rates.”

Comerica is exiting the mortgage banker finance business. This should primarily affect the warehouse lending business.