A Further Backup in Rates

Yields continue to push higher with the 10-year on track to potentially reach 5% for the first time since 2007.?Higher yields may work to assist the Fed in slowing the economy and achieve more benign inflation. However, the rise itself can also be justification for the Fed to continue to firm policy. As Minneapolis Fed President Neel Kashkari noted earlier this month, if the recent move in Treasury rates is?a reflection of a change in expectations regarding monetary policy, “then we might actually need to follow through on their expectations in order to maintain those yields.”

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In either case, a strong consumer and solid economy, coupled with elevated – and in some cases rising – inflation, will make it increasingly difficult for the Fed to argue for?a further pause in policy, although international conflict does at the very least complicate the timeline for future policy initiatives.?

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Fed officials, meanwhile, continue to muddy the waters with varying options and ample commentary.?

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Yesterday, Fed Governor Christopher Waller noted that the Fed could wait and see if the data warrants further monetary restraint. Speaking at an event for the European Economics and Financial Center in London, Waller said, “I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate.” Waller went on to note that he would be closely watching the data to see “whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up.”

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Also speaking yesterday in an interview with WSJ, Philadelphia Fed President Patrick Harker noted that the Fed can pause rate hikes: "This is a time where we just sit for a little bit. It may be for an extended period; it may not. But let's see how things evolve over the next few months."

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On the other hand, New York Fed President John Williams noted that rates need to be restrictive for “some time.” Speaking during a moderated conversation at Queens College in New York, Williams said, “We’re going to stick at it to make sure that we really achieve that goal of 2% on a sustained basis…We need to keep this restrictive stance of policy in place for some time.”

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Additionally yesterday, Fed Governor Lisa Cook spoke on the Fed’s dual mandate at the 2023 Future of Black Communities Summit’s Louis E. Martin ceremony in Washington. Without commenting on future monetary policy, she specifically spoke about maximum employment. Cook noted, “The past three decades have shown that unemployment can fall well below the levels that economists once predicted would overheat the economy.”

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And finally, Fed Governor Michelle Bowman gave opening remarks at a Fed Listens event in Richmond, noting “inflation has come down, but we know that it is still too high.” Richmond Fed President Thomas Barkin also took part in the Fed Listens event.

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Later today, Fed Chairman Jerome Powell is poised to take the stage. Powell has been one of the more hawkish members, at least from the standpoint of reiterating the notion that the Fed has one job and the Committee will stay the course until that job is done. We expect similarly hawkish sentiment today, although investors don’t yet seem convinced. ?

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On the economic calendar yesterday, housing starts rose 7.0% in September, pulling the annual pace up from 1.269M to 1.358M, a two-month high. Starts were expected to rise 7.8%, according to the median forecast on Bloomberg. Single family starts increased 3.2%, and multi-family starts climbed 17.6%. Year-over-year, housing starts fell 7.2% in September following a 15.7% drop in August.

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Building permits, on the other hand, declined 4.4% in September, pulling the annual pace down from 1.541M to 1.473M, a two-month low. Building permits were expected to fall 5.7% in September, according to Bloomberg. Single family permits rose 1.8%, while multi-family permits declined 14.3%. Year-over-year, building permits declined 7.2% in September following a 2.8% decrease in August, and marking the fourteenth consecutive month of decline.

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Also yesterday, MBA mortgage applications fell 6.9% in the week ending October 13 following a 0.6% increase the week prior. The 30-year mortgage rate, meanwhile, rose 3bps from 7.67% to 7.70%, the highest since 2000.

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This morning, initial jobless claims unexpectedly dropped 13k from 211k, revised up from 209k, to 198k in the week ending October 14, the lowest level since January. The four-week average declined from 207k to 206k. However, continuing claims, or the total number of Americans claiming ongoing unemployment, rose from 1.705M to 1.734M in the week ending October 7.

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In addition, this morning, the Philly Fed Index rose from -13.5 to -9.0 in October, falling short of the expected gain to -7.0, albeit a two-month high.

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In the details of the report, employment rose from -5.7 to +4.0, shipments climbed from -3.2 to +10.8, and new orders gained from -10.2 to +4.4 in October. On the other hand, prices paid declined from 25.7 to 23.1, delivery times dropped from -14.9 to -21.4, and inventories decreased from +8.9 to -7.0. Also, the six-month outlook index inched down from 11.1 to 9.2 in October, a two-month low.

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Later today, existing home sales are expected to decline 3.7% from 4.04m to 3.89m in September, and the Leading Index is expected to decline 0.4% in September following a similar decrease in August.

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Tomorrow, the economic calendar is empty.

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-Lindsey Piegza, Ph.D., Chief Economist