How Dovish Will The Fed Be Today?

Jan 30, 2019
Federal Reserve Board Room

The FOMC will be out at 2pm EST with its rate decision and a post-meeting press conference will follow so we suspect the market will be quiet till then. While there is no expectation of a rate hike today the real suspense will be in the degree of dovishness displayed in the statement and post-meeting press conference, which is a new feature in 2019 to have a conference after every meeting. Since the December rate hike, signs have only increased about a gathering global slowdown and the month-long government shutdown only added to those concerns. We think Powell and Co. will display a bit more cautious confidence in the economy than the ebullience that characterized the December meeting. They are also likely to sprinkle the word “patience” in the statement and press conference as it relates to future rate hikes. While we fully expect the Fed to pause in March, we don’t expect they will take rate hikes off the table for all of 2019, which is where the fed funds futures market is priced now. Thus, we think the short-end of the curve could come under some pressure when the Fed fails to be full-on dovish. In any event, we’ll be back later today with a summary of the meeting and the policy implications for 2019.


newspaper icon  Economic News


As the market awaits the Fed decision later this afternoon, we are still waiting on the backlog of delayed economic reports to start trickling in but until then we are getting some privately-sourced releases and they are not likely to add any measure of confidence to the Fed in their deliberations today. 


The first was the Conference Board’s Consumer Confidence reading for January and predictably confidence took a hit from the government shutdown. The index for January disappointed at 120.2 versus 124.0 expected and 126.6 in December. This is the lowest headline print since July 2017, (i.e. pre tax reform). Both the present situation reading at 169.6 from 171.6 and the expectations index at 87.3 from 99.1 reflected the December financial and political volatility. The expectations index dropped to the lowest level since October 2016. The one bright spot was that the labor differential (jobs plentiful minus hard to get) remained near cycle highs. On net, with the shutdown now over, one can argue the January dip should rebound, but if White House and Congressional negotiations head south and the February 15th deadline approaches without a new deal, it’s likely confidence will take another hit and the potential negative impact from weakening sentiment on domestic consumption could present an additional downside risk to the US economy.


Another report from yesterday also added to the sense that the housing market continues to lose momentum.  The S&P Case Shiller 20-City Home Price Index for November came in below expectations with a 4.7% Year-over-Year price gain versus 4.9% anticipated and 5.0% in October. The November YoY print is the lowest since early 2015 and has now decelerated for eight straight months. While this November report is somewhat dated, other December releases point to continued slowing in activity. The existing home sales report is a timelier indicator and the historical correlation of its annual median price change with the S&P Case Shiller is around 83% which forecasts to a 3.5% YoY appreciation rate in December for the Case Shiller series. If that comes to pass it will be the lowest YoY gain since 2012.  It looks as if annual price gains are regressing to a level that may eventually match the 3.2% rate for annual wage gains. With the recent University of Michigan Consumer Sentiment Survey showing  the worst housing affordability conditions since the crisis, it seems interest rates will have to fall and/or home price gains continue to moderate in order to tilt the affordability equation to more favorable ground. Consumer confidence and consumption could wane as well if home price gains continue to slow. 


Meanwhile, the U.S. and China trade delegations will meet today in D.C. but with the U.S. criminally charging Huawai and its CFO with stealing American technology and breaking US sanctions against Iran, the possibility of a large breakthrough in talks seems unlikely. This doesn't bode well for concluding an agreement before the March 1 deadline but both sides have previously shown a willingness to postpone the announced 25% tariff so it’s entirely possible that such a delay could occur again. But the latest charges against Huawai add to skepticism that a game-changing deal in regards to IP-theft and technology transfers (the real focus of U.S. negotiators) can be had in a short time frame. 


We think, however, that both sides want to avoid the appearance of a complete breakdown in talks which hints that a more modest proposal regarding market access, etc., will be approved. Even a modest agreement is likely to be both risk and growth positive, leading to a modest upward move in rates. That’s not breaking any new analytical ground but it is one issue that could push rates a touch higher, but it’s not likely to be a game changer, thus we see long-term rates range bound until more clarity arrives as to the growth and inflation prospects for 2019.


Finally, much angst has been leveled at the Fed’s quantitative tightening and the impact it’s having on yields, liquidity and volatility as it reduces its balance sheet. Meanwhile, the Treasury auctioned over $240 billion in bills and notes this week and the reception was warm and welcoming, and that’s after a nearly 50bps dip in yields from the highs in December. Where the Fed ends its QE run-off is still an open question but the end will likely be more technical in nature, keeping adequate reserves to manage the fed funds rates, and not a reaction to higher rates. In that case QT could end later this  year or early 2020 when assets drop to the $3 to $3.5 trillion level from $3.9 trillion presently.




chart icon  Home Price Appreciation Continues to Slow


The rich vein of home price appreciation that has helped consumers rebuild their net worth looks to be ebbing as the November S&P CoreLogic CS 20-City Home Price Index dipped for an eight straight month.  The latest YoY gain was 4.7%, the lowest since early 2015.  As long as wage gains remain in the low 3% range, and interest rates remain range bound, home price gains seem destined to dip even further. In fact, the December median price gain for existing home sales implies a 3.5% YoY gain for the Case-Shiller series if historical correlations remain. A continued moderation in price gains could act to inhibit consumer confidence and spending.


Home Price Appreciation



graph icon Agency Indications — FNMA / FHLMC Callable Rates


Agency Indications — FNMA / FHLMC Callable Rates



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