Olivia

Summary The rate on the 30-year fixed-rate mortgage has risen significantly since the beginning of the year. It currently sits at 5%, the highest rate in more than three years. This benchmark mortgage rate primarily reflects two components: the yield on intermediate- to longer-term Treasury securities and a spread that tends to fluctuate over time. The Federal Reserve has held agency mortgage-backed securities (MBS) on its balance sheet since early 2009. We estimate that Fed purchases of these securities have pulled down the yield on the benchmark 30-year MBS by about 50 bps or so on average since 2009. Fed officials have indicated they will allow their MBS holdings to decline in coming months. Will this cause mortgage rates to shoot even higher? Not necessarily. First, markets are forward-looking, at least to some extent, and recent mortgage spread widening is consistent with markets accounting for smaller Federal Reserve MBS holdings going forward. Second, Fed purchases of mortgage-backed securities in recent years have pulled MBS yields lower than actual mortgage rates. As balance sheet runoff progresses at the Federal Reserve, it is reasonable to expect that MBS yields will face more upward pressure than actual mortgage rates. But, mortgage rates could… Read More »Will mortgage rates rocket even higher in coming months?

Tough talk from the Fed roiled markets this past week, with stocks as well as precious metals getting hit.  On Thursday, Federal Reserve chairman Jerome Powell said the central bank intends to pursue a more rapid pace of interest rate increases. He indicated that a 50-basis point hike in May is likely.   Jerome Powell: We really are committed to using our tools to get 2% inflation back and I think if you look at, for example, if you look at the last tightening cycle, which was a two-year string of 25 basis point hikes from 2004 to 2006, inflation was a little over 3%. So, inflation's much higher now and our policy rate is still more accommodating than it was then. So, it is appropriate, in my view, to be moving a little more quickly. And I also think there's something in the idea of front-end loading, whatever accommodation one thinks is appropriate. So, that does point in the direction of 50 basis points being on the table, certainly. We make these decisions at the meeting and we'll make them meeting by meeting, but I would say that 50 basis points will be on the table for the May… Read More »Fed Chairman Powell spooks the market by signaling 50 point hike

Overview: The dollar is surging into the weekend, amid tumbling stocks and rising rates. The euro has been sold through $1.08 after reversing lower yesterday, despite the stronger than expected flash April PMI. Poor UK consumer confidence and a sharp drop in retail sales has seen sterling sold to new lows since November 2020, below $1.2900. The beleaguered yen is consolidating its recent drop and remains inside the range seen Wednesday for the second consecutive session. Most Asia Pacific equities fell though China's CSI 300 rose 0.45% to snap a five-day slide. Europe's Stoxx 600 gapped lower and is now lower on the week. US futures are slipping lower. European rates are a bit firmer after yesterday's surge that lifted the 10-year Gilt above 2% for the first time since 2015. The German 2-year trade at almost 0.25%, is the highest since 2014. The US 10-year yield is up around four basis points to 2.95% and the 2-year yield is up seven basis points to 2.76%. It is up about 30 bp this week. Most emerging market currencies are lower. The dramatic sell-off of the Chinese yuan gained momentum. It is about 0.6% lower to bring this week's drop to… Read More »Dollar surges into the weekend

The Canadian dollar failed to capitalize on better than expected data today. Instead, the USDCAD pair stayed above its 200-day moving average, signaling further gains for the pair (losses for the Canadian dollar). At the time of writing, the Loonie was down 0.7% against the USD, with the USDCAD pair trading at 1.2670, the highest level since 17 March. Earlier today, Canadian retail sales for February fell from 3.3% to 0.1%, but higher than -0.1% expected. At the same time, retail sales ex-autos decelerated from 2.9% to 2.1%, also better than analysts forecast of 0%. Additionally, the Canadian raw material price index, which measures the prices of key raw materials paid by Canadian manufacturers, nearly doubled in March, printing 11.8% from 6.4% previously, confirming inflation pressures are rising. Later today, the US manufacturing and services PMI for April are on schedule, projected to decline slightly, but these numbers rarely influence the USDCAD pair. The Canadian dollar also lost some ground as the WTI oil seems to be unable to rise significantly above the 200-day moving average. At the same time, the US dollar continues to dominate the markets, boosted by rising US yields and the recent hawkish Fed talk. The… Read More »USD/CAD stays above 200-day average after Canadian Retail Sales

Outlook: It doesn’t show up on the Econoday calendar but we get the US April flash PMI today. The Baker Hughes rig count this afternoon may be of more interest again. Fed chief Powell seemed to endorse not only a 50 bp rate hike at the May meeting, but perhaps additional 50 bp hikes at the June and July meetings, too. See the CME Fed watch tool chart. It shows 49.8% of traders expect Fed funds to be at 2.75-3.0% by the December meeting, while 40.8% sees 3.0-3.25%–that bunch was only 4% a week ago. Two things: weirdly, the 2/10 breakeven as reported by the St. Louis Fed fell to +0.22% yesterday from 0.39% on Monday. Apparently, the Powell remarks failed to move everybody. You’d think the yield curve would steepen. It’s still better than the negative 0.5% we had on April 1. Also, critics point out that the Taylor Rule calls for Fed funds to be higher than the inflation rate, so with inflation at 8.5% (CPI version), Fed funds really should be 10%, or something. Let’s play our record again–with the Fed balance sheet at some $9 trillion after many years of QE, nobody knows where Fed funds… Read More »FX market is getting a little more press these days because of the yen

Sterling and UK stocks declined on Friday after the weak retail sales and PMI numbers from the UK. Data by the Office of National Statistics (ONS) showed that retail sales fell sharply in March as prices of most items rose. Sales fell by 1.4% in March while core sales fell by 1.1%. On a year-on-year basis, sales rose by 0.9% while core sales fell by 0.6%. Further data by Markit showed that PMIs declined in April, signaling that the economy is slowing substantially. Therefore, there are worries that the Bank of England will implement a strategic pause on rate hikes. Global stocks declined sharply over concerns of higher interest rates in the United States. Bond yields rose to the highest level in years. In Europe, the DAX and CAC 40 indices dropped by 1.77% and 1.45%, respectively. In the UK, the FTSE 100 declined by 0.85%. Elsewhere, in the United States, futures tied to the Dow Jones fell by 100 points while the ten-year bond yields rose to 2.92%. Some of the worst performers in premarket trading are tech firms like Nvidia, Netflix, Amazon, and AMD. Some of the companies expected to publish their results today will be Coca-Cola, Verizon,… Read More »GBP/USD plummets after worrying UK retail sales and PMI

Europe It’s been a disappointing end to the week for markets in Europe, after Fed chair Jay Powell signalled that the Federal Reserve could well go much harder, and a lot quicker when the central bank pulls the trigger on the first of what might be several 50bps rate hikes, starting next month. Financials appear to be taking the biggest hit, after a narrowing of yield differentials, prompted concern about the prospect of a policy mistake by central banks, and a possible recession by the end of the year. This has manifested itself in weakness in the likes of Schroders, Abrdn and Hargreaves Lansdown, as well as HSBC, and Barclays ahead of the start of UK bank Q1 results, which are due out next week. Fears about an economic slowdown are an easy conclusion to draw, especially when you look at today’s disappointing UK retail sales numbers for March, and consumer confidence in April falling to its lowest levels since July 2008. B&M European Retail is the largest faller on the announcement that its CEO Simon Arora will be retiring in 12 months’ time. Even without that it’s still been a weak session for the sector as a whole after… Read More »Hawkish Fed and growth concerns rattle European markets

Stocks are falling hard this afternoon, as the gains of earlier in the week disappear in a flurry of selling that reflects nerves about central bank tightening and poor earnings. Stocks reverse course on tightening fears “Yesterday’s optimism has vanished now that Powell appears to have moved into the 50-basis point rate hike camp. The market had seemed to have adjusted to a faster pace of hikes, but the view is now that, if Powell is happy with 50 basis points, then it gives cover for others to call for even faster tightening. This has cut the foundations from underneath the rally in stocks over recent days, and suggests that the second half of April will be just as tough as the first for most equities.” Tech stocks spell trouble for the market “The big tech names are still reeling from Netflix’s earnings, but the pain isn’t over it. While the sector is relatively quiet today, next week’s earnings may spark another cycle of selling. When set against the huge losses suffered by Meta and Netflix, Apple’s 9% decline is minor.  But even Apple can’t hold up the whole market forever, and with stocks dropping again today it looks like… Read More »Indices deep in the red

The dollar index regained traction after brief pullback was strongly rejected at 100 zone and hit new 25-month high on Friday. The greenback was lifted by a hawkish message from Fed Chair Powell about possible 50 basis points hike in the next policy meeting, which contrasted repeatedly dovish tones from the ECB’s President Lagarde, who hinted that the central bank might need to cut its growth outlook and sidelined some positive signals, sent by ECB policymakers previous day. Daily chart points to bullish continuation as shallow pullback ended in hammer candle on Thursday and Friday’s fresh bullish acceleration  added to positive signals. Rising bullish momentum and diverging ascending daily Tenkan-sen and Kijun-sen in positive setup, support the action, which is expected to maintain bullish bias above 100 level. Fresh bulls look for close above previous high at 101.03 to open way towards immediate targets, Fibo projections at 101.50 and 101.79, but could extend above 102 mark on stronger acceleration, as the greenback remains supported by safe-haven buying. Res: 101.32; 101.50; 101.79; 102.00 Sup: 100.73; 100.33; 100.54; 100.00

Many of today’s inflation hawks attribute the current high levels of inflation to excessively loose economic policies — both fiscal and monetary. They point to the policies implemented at the onset of the pandemic when public health considerations precipitative forced shutdowns across many sectors of the economy. At that time, Congress passed a massive covid relief bill that directly defrayed business losses and supported consumer spending; and the Fed sharply ramped up its purchases of financial assets, keeping interest rates near zero and assuring ample liquidity to allow the recovery to gain traction. Would it really have been a better choice to have pursued policies that would have deferred these achievements until some more distant date? I tend to think not. I accept the current level of inflation as somewhat of the price that had to be paid to get America back to work. In any case, if you want to blame policy makers for being responsible for our current inflation, it’s only fair to credit those same people and institutions for precipitating the rapid pace of economic expansion that we’ve enjoyed for the last 6 quarters and counting, culminating with the recovery of virtually all the job losses from… Read More »Fighting inflation: Challenging conventional wisdom