Markets remained calm all week, which would make one week in a row and quite an achievement given the general level of anxiety and efforts by financial media and political figures to drive us all over the edge.
The Dow managed a 500-point gain this week, which compared to the volatility in prior months was no trading at all. The US 10-year T-note made it down to 2.55% at maximum panic on January 3, the next day rebounded to 2.67%, and is 2.69% today. 30-fixed mortgages are still in the vicinity of 4.75%.
Peace, brothers and sisters, peace.
Two months ago the 10-year T-note was 3.23%. A half-percent clunk down is a big deal, and means several things. First, a reaction to stocks. Second, a powerful signal to the Fed that an overheated labor market is not the inflation threat which the Fed has seen, at least not yet. Third, down in response to chaos.
Focus on chaos. Chair Powell has had a tough three months. He is a rookie and deserves some slack, and is either poorly supported by colleagues or has not asked enough of them to help him. Last fall Powell in an unguarded moment said that the cost of money was a “long way” from neutral, and a month later corrected himself but the adventure added to volatility. In his post-meeting remarks on December 19 he did it again, indicating a far tighter Fed than the Fed intended, and torched markets into a volatility bonfire.
This week, the first week with everybody back at work, the Fed released the minutes of its December meeting, which do not resemble Powell’s post-meeting performance. Four regional Fed presidents spoke in the last week, the four most-capable of the dozen: Rosengren (Boston), Evans (Chicago), Bostic (Atlanta), and perhaps the best single person at the Fed and most market-savvy, Kaplan (Dallas). All of them engraved a pause ahead, perhaps a long one, and all without saying so tried to erase Powell’s performance. Kaplan appeared first, on CNBC and I thought was annoyed at having to correct the off-messaging.
Footnote, boring inside-Fed politics: the president of the NY Fed is supposed to ride herd on markets and provide to the Chair the best-possible market information and guidance. Anybody at the NY Fed or junior trader on a bond desk could have told Powell in advance how his remarks would play. Did he not ask? Or did NY let him down? The new NY Fed president is John Williams, who got himself promoted from the SF Fed. Williams is a nice man, but his writings and public thinking have been featherweight. During the greatest market volatility in a decade, Williams has been silent.
Market people have made it all worse. David Rosenberg (Gluskin Sheff) is a widely read daily commenter who announced this week that the US economy is a “complete facade” and “We’re going into recession… more than 80% chance” in 2019. Maybe he’ll get lucky. More likely: irresponsible balderdash. The usual suspects are hammering away at the Fed’s QE unwinding, refusing to do homework and claiming imaginary effects.
Back to the Fed’s meeting minutes. These things are a pain to read unless you’re used to the official-speak. The Fed staff’s rundown on US and foreign economies in December was benign, downright bland, and in great detail. The “participants” — Fed governors and regional presidents — summarized in the minutes did not support Powell’s post-meeting apparent (unintended?) hawkishness. Not because they fear recession, and consistent with the four speakers this week advocated a long pause for two reasons: 1) markets have been unstable, and it’s stupid to hit then when so, and 2) inflation is underperforming (again).
What are the odds that stock market weakness presages recession? Zilch, really, except as the decline may get deeper and uglier and have its own negative effect on consumption. The stock market’s issues are intrinsic, up too far too fast and appropriately “correcting.”
What else to worry about? Trade? Worry only about US bullying. Of course we need a new deal with China, but they don’t enjoy humiliation any more than we do. The SF Fed this week published a short, clear accounting here, which exposes our trade deficit as a minor issue not remotely justifying tariffs. Barely 10% of US consumption is imported.
What else? Housing? The WSJ amuses itself each week by announcing “battered” housing. Nonsense. Our only problem is no land, and a multi-generational shift from detached to attached. It will take time for zoning and consumer preferences to change. The most important housing markers, always: mortgage delinquency (falling) and yield curve.
The curve is flat, near inversion but not there and not likely to go there, at least not as in the past. Inversions are not a mystery. The Fed hikes into overheating economies, all rates rising. At some point mortgage rates reach a level which cracks housing demand, a level impossible to see in advance. Housing sales fall, and so does demand for loans. Long-term rates fall while the Fed is trying to figure out what is happening, a true cycle turn or temporary wobble? Always overshooting its tightness. The Fed can’t help it, the future always murky, and thus long-term rates fall below short-term ones and recession follows.
When mortgage rates topped 5% we were getting close to an old metric: a two-point rise in mortgage rates tends to mark recession. That would be 5.50% this time around. Now we are safely back in the fours. This is also the first US expansion ever in which mortgage lenders have not cut underwriting standards, and mortgaged households are strong.
What else? This shutdown thingy? Heavens. First principle: it’s not about a wall, or a fence, or the border. It’s a pure power struggle in which the president wants to force congress to kneel. The president is likely to try government by emergency decree, which can run out of control, but this is not the Reichstag fire — although if congress and the courts allow this one, there will be more phony emergencies and decrees.
Article I, Section 9: No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law…. Congress has made emergency and war-power concessions to the chief executive because the modern world moves so much faster than at the crafting of the Constitution. While we work out our politics, and the branches reassert themselves or do not, stick with cheerful cynicism. The shutdown has terrible effect on 800,000 loyal workers, but little economic effect.
Peace, brothers and sisters, peace.
The 10-year T-note in the last year, today’s trading not included, markets not yet closed, trading 2.69%:
The 2-year T-note, the Fed-forecaster says no hikes at all in 2019. 2s are 2.54%, the Fed now in a band 2.25%-2.50%:
This chart was appended to Rosengren’s speech this week. No matter what the Fed may be worried about, no sensible person would continue rate hikes while global stock markets are unstable:
A tale of two photos. One is John Williams, the new NY Fed president. The other one is E. Gerald Corrigan, Paul Volcker’s NY Fed president. Guess which is which, and ask which one you’d like to have keeping watch on Wall Street: