The Stock and Bond Markets will be closed all day tomorrow for the Juneteenth Holiday. We will release our next update on Monday.
Stocks are rallying, Bonds are rebounding, and oil is moving lower, breaking under $74/barrel. This is following yesterday’s Fed meeting, broken down below, and the announcement this morning that the peace deal between the US and Iran has been signed, which is providing a tailwind.
President Donald Trump and Iranian President Masoud Pezeshkian signed a memorandum of understanding, which immediately opens the Strait of Hormuz and extends the ceasefire for another 60 days, during which time they will iron out details of a longer-term deal. A positive sign was that Iranian hardliner Ghalibaf also signed the deal days before.
Warsh Fed Meeting Breakdown
Kevin Warsh was very impressive as he conducted his first Fed meeting as Chair. He commanded the room, instilled a lot of confidence, and made significant changes.
The Statement was very short and to the point, spanning only four short paragraphs. The Fed unanimously voted to leave rates unchanged, showing he got good consensus despite Fed members previously seeming to support hikes.
Warsh committed to the 2% inflation target and said that the Fed will deliver. There was no forward guidance in the statement and it did drop the easing bias.
The markets reacted negatively to the Dots Plot Chart and Economic projections. As a whole, the Fed got more hawkish, with half the members expecting at least one hike this year, five expecting none, and one expecting a cut. Warsh did not participate in the Dots Plot, signaling that he does not believe in forward guidance and downplaying the importance of it. Let’s face it, the markets react to the Dots Plot, but they are never even close to reality and change so quickly.
The markets also reacted negatively to the Summary of Economic projections, which showed an upgrade to inflation expectations.
During the press conference, Warsh did not give opinion, gave a lot of credit to the committee, and referenced what they said in the statement for a lot of the answers that were trying to bait him.
He wants to look at real-time data, have less communication from the Fed, and create task forces to improve and reshape the Fed.
Warsh said that the markets react best when they respond to incoming data, not how the Fed will respond to incoming data…which is how it should be. When asked about a press conference after every meeting, he said that he believes he should speak when he has something important to say. With the changes coming, he suspects he will have some important things to comment on…but that opens the door for potentially not having a press conference after every meeting.
Warsh wants to create task forces to make important changes to the Fed. Those include:
Overall, the meeting was impressive, but the markets had a negative reaction, likely still programmed to look at the Dots Plot chart changes, Warsh’s commitment to 2% inflation target, and the upgrade in inflation expectations.
The markets are responding nicely this morning, potentially digesting the meeting and rallying on news of the peace deal signing and drop in oil prices.
Pending Home Sales
Pending Home Sales, which measures signed contracts on existing homes, rose an impressive 3.8% in May, which was much stronger than the 0.8% expected. Sales have now increased four months in a row, and in the latest report, each region saw gains. This report, like the other housing reports we have seen recently, shows some resiliency in the market.
Cotality Rental Index
Cotality released their new rental report for April, showing that prices are up 1.4% year over year, which is a slight increase from 1.3% in the previous report.
For perspective, rental prices were up 2.8% at this time last year…so we are clearly seeing a slowdown. This should be helping the inflation reports, but it’s still lagging and not being fully realized. Warsh sees this, amongst other things, and is optimistic that his data project can help inflation come down by looking at real-time indicators.
Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 4,000 to 226,000, but has been higher the last few weeks, relatively speaking, and at the highest levels since February. The trend is worth keeping an eye on.
Continuing claims, or those who continue to stay on benefits after their initial claim, rose 24,000 to 1.8M.
Technical Analysis
Mortgage Bonds are rallying after a tough day yesterday. Bonds are still trading in the same range they have been, between support at the 25-day and overhead resistance at the 50-day. Bonds still have about 11bp of room to move higher until reaching resistance.
The 10-year is almost back where it was before the Fed meeting, performing better than MBS relatively speaking. Yields are once again testing support at the 50-day Moving Average, which will be tough to break, but the next floor beyond that is 4.33%.
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