Homebuyers to builders: Give me shelter!

Stocks had a mixed close in a topsy turvy trading day as the Fed scolded the bulls with threatening body language. Rates remained unchanged but their future looks anything but.

You can’t always get what you want. Everyone, even folks who have no idea what the Fed Funds Rate is, wants to see the Fed stop the hiking and start talking about cutting once again. Have higher Fed Funds rates affected you? Has your mortgage payment gone up? Not if you have a locked-in, fixed mortgage. Have higher rates made your auto loan payment higher? Not really, those rates were already high. What about ANYTHING you buy as a consumer; has the Fed been effective in making you want to stop consuming? You don’t have to answer, we already know it. If you owned stocks or bonds last year, the Fed’s rate hiking certainly affected your financial well-being, and likely your mental well-being as well. That has put everyone in a sour mood, even people who don’t own any stocks. This just adds to the frustration of real inflation which does affect all of us. But for those of us who DO own stocks and bonds, a nicer Fed would be very much appreciated, because we know that portfolios tend to grow in those types of environments. So, yes, everyone was relieved yesterday when the Fed decided to keep rates unchanged and forego a rate hike for the first meeting in over a year. But of course, there was a catch.

Inflation is coming down as evidenced by not just Tuesday’s Consumer Price Index / CPI, but also by yesterday's Producer Price Index / PPI, which is considered a leading indicator of supply-push inflation. The headline PPI number actually fell in May. Progress, indeed, but not nearly enough to stop the pain at the cash register. Also, not nearly enough to get the Fed to put down the hammer altogether. Knowing that inflation is still too high and frustratingly sticky, any reasonable investor would expect the Fed to maintain its vigilant stance. That is why, while many Wall Streeters expected a pause, most were anticipating it to come with a side order of hawkish rhetoric. The Fed, you see, would like us to continue to be scared, which theoretically will cause us to spend less, demand less, and ultimately force companies to lower prices. Ok, yah, but that takes time… and it has been a slow process, because capitalism is hard to put down… and not just in the US. You would be shocked if I shared retail sales figures (hint: they are strong) from non-capitalist China… whose central bank is trying to stimulate its economy. None of this is giving Fed policy makers any comfort.

Leading up to this meeting, it was clear that no FOMC members were in favor of cutting interest rates yet, though some began to admit that it was time to let the already-restrictive rates take effect. So, we should not be surprised that yesterday’s vote was unanimous to keep rates steady. But the future of rates is very much up in the air. You see, the Fed released its quarterly forecast (including the infamous Dot Plot) along with policy yesterday and 2/3 of the policy makers believe that we will get at least 2 more rate hikes by the end of the year. Yes, 2! Further, they collectively believe that the economy will be stronger than previously expected in 2024, which does not help the rate-cut narrative. All that was not quite broadly expected. Chairman Powell, additionally, wanted to make sure that we got the message. In his press conference, the chairman squawked like a hawk telling us the rate cuts are years away, shutting down hopes of 2024 cuts. Ouch!

The markets adjusted somewhat to these revelations. Fed Funds futures continued their recent readjusting to factor out 2023 rate cuts altogether… which is likely to have pleased the Fed (remember they want us to be scared). HOWEVER, futures are still challenging the Fed’s jawboning, only factoring in 1 more +25 basis-point hike in 2023. Maybe it’s because traders are eyeing the yield curve which flattened to earlier-2023 levels. The 2-year/10-year curve is already inverted, which has been a pretty reliable predictor of a recession in the past. If indeed a recession does come for the US later this year, as many economists are still predicting, the hawks may have to stand down. Whether the doves take flight and whether rates will be cut will, of course, depend on the magnitude of the economic decline. For now, let’s just assume that we got a hawkish pause yesterday, and that it is probably already factored into the market.

WHAT’S SHAKIN’ THIS MORNIN’

Lennar Corp (LEN) shares are higher by +2.83% in the premarket after announcing that it beat EPS and Revenues by +27.04% and +10.34% respectively. Additionally, the company announced a better-than-expected number of purchase contracts indicating strong demand. The company, further, raised its full year guidance on home deliveries to 70k from 68k, also exceeding analysts' expectations. Dividend yield: 1.20%. Potential average analyst target upside: +4.0%.

This morning’s top volume, premarket movers on the S&P500 include Tesla, AMD, Carnival Corp, NVIDIA, Intel, Apple, Amazon, Ford, American Airlines, and Alphabet. They are all lower in premarket trade as traders respond to yesterday's hawkish Fed and this morning’s ECB update.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as elation over a happy miss on PPI was quashed by an angrier than expected Fed. The S&P500 rose by +0.8%, the Dow Jones Industrial Average declined by -0.68%, the Nasdaq Composite Index advanced by +0.39%, and the Russell 2000 Index dropped by -1.17%. Bonds gained and 10-year Treasury Note yields lost -2 basis points to 3.78%. Cryptos inched higher by +0.02% and Bitcoin jumped by +3.69%. The S&P500 ESG Index rose by +0.07%.

NEXT UP

• Retail Sales (May) are expected to have slipped by -0.2% after gaining by +0.4% in April.
• Initial Jobless Claims (June 10^th) is expected to come in at 245k, lower than last week’s 261k.
• $120 billion in 4 and 8 week Bills will be auctioned by the Treasury this morning.