MBS up 6 bps. 10yT down 5.
Both the Bank of England (BOE) and European Central Bank (ECB) released policy announcements early this morning. Both were as-expected in terms of rate hikes. The ECB took a somewhat different approach and pre-committed the next rate hike (another 50bps), but said it would re-assess after that. That would be like the Fed saying it knows exactly what the terminal rate is and letting the market know when it was coming.
The ECB also said reinvestments would continue through the end of 2024 and that its balance sheet runoff would be managed to avoid interference with the appropriate monetary policy stance. That’s a very weird and confusing comment since balance sheet runoff IS part of a policy stance. We take it to mean that the ECB wants a smaller balance sheet, but it doesn’t want to cause too much policy tightening in the pursuit of that goal. As such, it may slow the pace of roll-offs if inflation and growth contract enough.
Jobless Claims: 183 vs 200 f’cast [186k prev]
Unit Labor Costs, Q4: 1.1 vs 1.5 f’cast, 2.0 prev
Powell’s comment Wednesday that the “disinflation process has started” suggested that the aggressive tightening cycle is starting to reduce the pace of price growth, even as he warned of a “couple” more hikes to come. Positioning in US swaps markets assumes the Fed is getting closer to cutting rates as traders bet that economic conditions are likely to keep it from the additional rate increases that policy makers still anticipate.
The Fed Funds futures currently see a 85% chance of another 25 basis point hike in March, with 15% handicapping no change in policy. The markets see a 30% chance of another 25 basis point hike at the May meeting. The yield curve continues to invert, with the 2s-10s spread at -71 basis points.
Nonfarm productivity increased 3% in the fourth quarter of 2022, which was above Street expectations. Output increased 3.5% while hours worked rose 0.5%. Unit labor costs rose 1.1% as compensation rose 4.5% and productivity rose 3%.
Pulte Homes announced fourth quarter earnings, with a 20% increase in revenues and a 200 basis point increase in gross margin. The increase in gross margin means that Pulte hasn’t been forced to grant concessions to move the inventory. That said, these Q4 sales were initiated earlier in 2022 before mortgage rates spiked.
Orders were down 41%, which reflects an elevated cancellation rate of 32%. Interestingly, the stock market is looking over the homebuilding valley. The homebuilder ETF (XHB) is up 29% over the past 3 months.
The Biden Administration is planning on releasing a Tenant Bill Of Rights, which has been drafted by community organizers and pro-tenant lawyers. It will attempt to find a way to impose national rent control. Ultimately the problem is that housing is in a dire shortage, and these measures will do nothing to increase supply – if anything expropriation of property rights will cause investors to raise the required rate of return to take into account regulatory risk, which means new investment will get harder, not easier.