Fed Raised Overnight Rate by 0.75% and Might Do it Again … The central bankers raised the federal funds rate (FFR) from a range of 0.75%–1.00% to a range of 1.5%–1.75%.
What it means— With inflation bumping along at about 8.5%, we can be forgiven for looking at the Fed’s latest move and asking, “So what?” The Fed was trying to send a strong message about its willingness to fight inflation, but their fabled dot plot doesn’t bear that out. The graph, which shows FFR estimates for each voting member, reflects an average FFR this year of 3.375%, expected to rise to about 3.75% next year. If the central bankers want to flex their monetary muscles to fight inflation, they’ll need to aim a lot higher.
The move by the Fed, along with Powell’s estimate of another 0.50% or 0.75% hike in July, pushed up rates along the yield curve. The 10-year Treasury bond yield pushed through 3.43%, the highest level in more than a decade. Rising rates likely won’t do much to quell inflation caused by geopolitical events, but they will make stocks less attractive and require consumers to pay more when financing cars, homes, and even credit card debt.
This isn’t very reassuring. Reuters reported on May 4th that JPow insisted “a 75 basis point increase is not something that the committee is actively considering.” Why did the Fed decide on 0.75% over 0.50%? “…75 [basis points] seemed like the right thing at this meeting.” And during the press conference, “Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common.” Then there is the oxymoron that the labor market is strong and the GDP forecast is zero. So, everything is OK? And the Effective Federal Funds Rate is negative 7%. Since the Fed has been late and wrong for more than a year, we can conclude that there is no plan except to react and hope it works. What has been clarified is that we are in a new world of capital assumptions.
Housing Starts Fall 14.4% to Lowest Level Since April 2021… Single-family housing starts fell 9.2%, while multi-family starts dropped 26.8%.
What it means— Housing starts are notoriously noisy, but there’s no question that the numbers are dropping quickly. Home builders are getting in front of potentially falling sales due to rising mortgage rates. With new-home inventory still low, it’s possible that builders might be able to keep prices from dropping dramatically by easing supply to match the estimated fall in demand. New-home sales are just 10% of the market but are important because builders, unlike homeowners, can’t just wait for better times. If builders get stuck with excess inventory, they’ll have to adjust their prices to get the units out the door. Prices for homebuilder stocks are already being hammered.
Retail Sales Fall 0.3% in May, Are Up 0.1% Excluding Auto Sales… Consumer retail sales fell in May for the first time in years, dragged down by auto sales, which slumped 3.5%.
What it means— This is the Bizarro Superman world, where things are backward. People are pointing to falling retail sales as a sign of inflation hitting the economy, but that’s not what the numbers show. Yes, retail sales dropped, but auto sales were the big culprit and car sales aren’t falling as a function of higher prices, they’re falling due to a lack of supply. If car companies could get an extra two or three million vehicles on their lots this year, consumers would buy them. The report showed falling spending on home furnishings and other goods but rising spending in restaurants and bars, the only service component in the report. This is right in line with consumers turning their attention to experiences and travel instead of Amazon.com as they get out and about after COVID.
Finally, inflation does play a part, in that the numbers are inflation adjusted. It’s not that we spent less, it’s that inflation outpaced our spending. From reading the headlines, you’d think that consumers are shelling out fewer bucks for stuff, and that’s not the case. It might happen in the months to come, but it didn’t happen last month.
The European Central Bank (ECB) Plans To Rescue Southern European Countries… The ECB announced plans for an “anti-fragmentation instrument” to hold down borrowing costs for countries like Italy and Greece. The plan was short on details.
What it means— Germans who opposed joining the monetary union in the 1990s must be wagging their fingers and shouting, “I told you so!” The big reason to oppose joining the euro back then was that someday the group might financially favor one member over another. EU supporters said that would never happen, and yet here we are. ECB President Lagarde said that the central bank would focus future bond purchases on bonds issued by countries with quickly rising borrowing costs. Italian 10-year bond yields
soared over the last year, rising from 0.9% to 3.8%, while Greek 10-year bond yields increased from 0.86% to 4.3%. Rising borrowing costs will make it harder for such countries to hold down their deficits, but Northern Europeans should be asking why that is their problem.
Texas Woman Arrested After Spitting on Corpse… Laurie Lynn Hinds, 51, apparently harbored a bit of animosity. Last fall, she walked into a viewing at a funeral home in Tyler, Texas, made a beeline for the casket, spit on the corpse, and left. The event was caught on videotape. It turns out that abusing a corpse is a felony in Texas, but Hinds wasn’t arrested at the time. A warrant wasn’t issued until December, and she was not arrested until this month. A trial date has not been released, and there’s no official information on what led to her actions. A witness has reported that Hinds had a beef with the family of the deceased. If Hinds was looking to get the last laugh, she might have failed. She faces six months to two years in jail and a $10,000 fine.
Data supplied by HS Dent Research
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