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Morning Report: The Fed delivers a hawkish pause


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Stocks are lower after the Fed produced a hawkish pause yesterday. Bonds and MBS are flat.

The Fed delivered a hawkish pause, skipping a rate hike in June but signaling there is still more to come. They increased the estimate for 2023 GDP growth to 1% from 0.4%, lowered their unemployment estimate from 4.5% to 4.1% and increased their forecast for 2023 core PCE growth from 3.6% to 3.9%.

They predicted another two rate hikes this year in the dot plot. The March / June comparison is below:

They see a Fed funds rate of 5.5% at the end of 2023 versus 5% in March. The outer years were pushed up as well. At the press conference, Jerome Powell telegraphed that the Fed is going to hike in July, by referring to the June meeting as “the skip.” and characterizing the July meeting as “live.”

The Fed Funds futures see a 65% chance for another hike in July, but are assigning a low probability for anything further. At some point we probably are going to have a recession. Historically, tightening cycles have triggered recessions and this one has been the most aggressive since Paul Volcker’s dramatic moves in the early 1980s which caused the deepest recession since the Great Depression. While it is always tempting to think this time is different, it probably isn’t.

Separately, the ECB hiked rates by 25 basis points this morning.

In other economic data, retail sales rose 0.3%, which was better than expected. Consumption remains strong, but the resumption of student loan payments looms at the end of the summer. Initial Jobless claims were steady at 262k, and industrial production fell 0.2%.

Homebuilder Lennar reported better-than-expected earnings however they were down on a year-over-year basis. Stuart Miller, Executive Chairman of Lennar, said, “During the quarter, we continued to see the housing market
normalize and recover from the Fed’s 2022 aggressive interest rate hikes in response to elevated inflation. As consumers have come to accept a “new normal” range for interest rates, demand has accelerated, leaving the market
to reconcile the chronic supply shortage derived from over a decade of production deficits. Simply put, America needs more housing, particularly affordable workforce housing, and demand is strong when price and interest rates are affordable.”

The press release didn’t mention cancellation rates, but it will probably come up on the conference call. Another interesting tidbit from the press release: “Our cycle time during the quarter was down slightly sequentially, and we believe it will decline further in the back half of the year as the improving supply chain and labor market will positively impact our production times.

Homebuilders in general have been gun-shy to build single-family residences in the aftermath of the bubble, and then supply chain and labor issues have been the impediment. It seems that perhaps this might be easing. Skilled labor is in high demand and plumbers / electricians can make a boatload – certainly more than most college graduates their age.

The homebuilders have been on a tear this year, with the S&P SPDR homebuilder ETF outperforming the S&P 500 by a large amount.

Weekly Initial Unemployment Claims at 262,000

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