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Vital Statistics:
Stocks are higher as we begin Fed Week. Bonds and MBS are up.
The week ahead will be dominated by the Fed decision, although we do have some important economic data. The Consumer Price Index will be released tomorrow, and that could impact the Fed’s decision. While the Fed Funds futures have a 74% chance of no increase, the markets are interpreting that as a “skip” not a “stop.” The July Fed Funds futures are assigning a 65% chance for a rate hike if nothing happens in June. Tightening credit may also be driving the narrative for a skip.
The Fed is caught between a credit crunch and inflation. “If inflation is going to fall quickly…we might be in a position to be able to cut rates, if not this year, then soon in the new year,” said Minneapolis Fed President Neel Kashkari in an interview last month. “But if, on the other hand, inflation is much more persistent and much more entrenched…then I think the stresses in the banking sector probably become more serious.”
The dot plot will be critical. At the March meeting, the FOMC largely forecasted that the Fed Funds rate would be at the current level, with a few forecasts for higher rates. I go into way more detail on this in my weekly Substack piece.
UBS sent a note to its clients expecting a hard landing, with GDP set to contract 1% in the coming quarters. Their model sees a 80% recession risk:
Aside from the Fed decision and the CPI, we will also get retail sales and consumer sentiment. Homebuilder Lennar reports earnings on Wednesday. The homebuilders have been on fire this year, with the S&P Homebuilder ETF (XHB) up 22% year-to-date.
Homebuilders report that there is still a shortage of lots, although it is better than it was in 2021. While you would think that work-from-home would make the exurbs more marketable, the issue is credit. Credit for developers is expensive and scarce. In addition, overall costs are higher and it is hard for builders to construct new homes that are affordable. Government regulation adds $94k to the price of a home alone.
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