Markets began today quietly ahead of the FOMC and Fed meetings this afternoon. Interest rates at 9:00 am EST remained unchanged from yesterday. Also unchanged were the bond and mortgage markets.
The Fed will increase the Federal Fund rate by 0.25% this afternoon, that is a given; what markets will focus on is how the policy statement will frame the outlook for more rate hikes. Markets are divided about whether there will be two or three more this year. This morning the May PPI was higher than estimates, overall PPI +0.5% against a consensus of +0.3%; yr/yr PPI +3.1% up from 2.6% in April. PPI core expected +0.2% increased 0.3%; yr/yr 2.4% up from 2.3% in April. Yesterday May CPI also reflected increases although it was in line with forecasts. Prices for steel mill products surged a monthly 4.3 percent following a 3.2 percent gain in April.
Prices for aluminum mill shapes came in at an even hotter 5.0 percent monthly gain that follows April's 1.8 percent climb. Gains in metals are at the intermediate level but may already be affecting the finished level where goods prices rose a sharp 1.0 percent in the month. The reality of tariffs beginning to be felt. Not news that the Fed is thinking that inflation will continue to increase and that the Fed does not want to be behind the increase and prepared to push short term rates higher this year.
Jerome Powell will hold his press conference after the FOMC meeting. Yesterday Powell suggested he wants to conduct a press conference after every FOMC meeting instead of every other meeting — a good idea allowing more information from the head of the FOMC that might lessen the reliance on other Fed officials that speak though the month. A press conference after each meeting will keep markets a little more edgy; up until now markets could be assured that a rate hike would only happen when the head of the Fed held a press conference and that has been every other month. A press conference each meeting allows the Fed more flexibility and will keep market analysts on their toes.
At the Summit with Kim, President Trump said he would end the “war games” held annually with South Korea. That upset many in Congress, worried that the President gave up too much to Kim. The White House said yesterday that the U.S. military would continue to train with its South Korean counterparts and conduct military drills—but not large-scale, joint exercises—in a clarification. Trump clarified that as long as the talks continued there would be no massive exercises and he reminded that the semi-annual cost was extreme for the US defense budget. Before Trump’s comment, the next scheduled joint exercise with South Korea was in August.
Weekly MBA mortgage applications declined last week; -1.5%, purchase apps -2.0% and refinance apps also -2.0%. Last week apps were up after five consecutive weekly declines; now it’s six declines in the last seven weeks. Unadjusted, purchase applications were down 0.2% from the level in the same week last year, dipping into negative year-on-year territory for the first time this year. Refinances account for 35.6% of all apps, unchanged from the prior week.
Not expecting any movement in stocks and bonds now until this afternoon when the FOMC statement, the Fed’s quarterly forecasts, and Jerome Powell’s press conference.Source: TBWS
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