• The U. Michigan consumer sentiment index edged higher this month as gasoline prices declined.

 

 

  • On the other hand, the Philly Fed’s factory index declined.

 

 

  • Homebuilder sentiment continues to deteriorate as demand weakens.

 

 

  • This trend doesn’t bode well for residential construction.

 

 

  • Mortgage rates at 6.4% are putting pressure on home prices.

 

 

The Fed

 

Expectations for a soft landing have gone out the window following the latest FOMC meeting on Wednesday. The question, now, appears to be how hard of a hard landing will there be. Things couldn’t have been more hawkish with the Fed’s “dot plot” showing a benchmark interest rate of 4.4% by the end of this year, as well as a terminal rate of 4.6% in 2023 (up from 3.25% and 3.8%, respectively). Lower growth forecasts and higher inflation estimates were also included in the projections, with the unemployment rate going up to 4.4% and leading to job losses of more than 1M (assuming no change in the size of the U.S. workforce).

“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Fed Chair Jerome Powell declared. “Reducing inflation is likely to require a sustained period of below-trend growth and there will very likely be some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run. We will keep at it until we’re confident the job is done.”

The Federal Reserve raised rates by 75 bps (in line with expectations) and promised more jumbo rate hikes ahead.

 

 

This week’s Federal Reserve meeting ended on a more hawkish note than some investors expected. Jerome Powell says, at least, the Fed will accept significant economic pain in order to control inflation.

Key Points:

  • Powell said Wednesday the Fed wants to see positive real yields across the entire curve, meaning yields higher than the inflation rate.
  • However, by “real” yields Powell means forward looking inflation expectations, not past actual inflation rates.
  • To end the tightening cycle, the Fed must feel confident inflation is heading back to 2%, i.e. a sustained directional change.
  • This means they want to see both tighter financial conditions andslower economic activity.
  • GDP growth is already weak and there are early signs of labor market weakness. Both need to soften further to convince the Fed inflation is returning to their 2% target.

Powell noted that core PCE inflation is still above 4% and not yet clearly trending down. The Fed will keep tightening until it is sure this has changed. Powell has served notice that pain to the economy will not change this plan.

 

Market Data

 

  • A stronger US dollar points to more downward earnings revisions.

 

 

  • The PMI-based earnings indicator from S&P Global also signals significant downgrades ahead.

 

 

Quote of the Week

 

“A day without laughter is a wasted day.”  Charlie Chaplin

 

Picture of the Week

 

It’s that easy… Mutual love and respect.

 

 

 

All content is the opinion of Brian J. Decker