Three Data items today, 1 long and 2 quite brief:
#1: Chair Powell’s press conference had the effect we suspect he wanted, namely to nudge capital markets into discounting a more aggressive pace of monetary policy tightening. Here is how that played out in Fed Funds Futures:
March meeting rate expectations:
- The odds of a 25 basis point increase (liftoff from zero) remain high at 90 percent, close to yesterday’s levels of 88 percent.
- The odds of a 50 basis point increase in Fed Funds went from 6 percent yesterday to 10 percent today. Powell did not rule out a 50 bp bump at some point this year when asked about it during his press conference.
May meeting expectations:
- Odds that the Fed will raise rates again at this meeting (assuming a 25 bp increase in March) rose to 61 percent today from 48 pct yesterday.
- Odds that the Fed would skip raising rates in May (assuming they go in March) fell to 32 percent from 46 percent yesterday.
June meeting expectations:
- Odds that Fed Funds will be 75 – 100 basis points (implying three 25 bp rate hikes in March, May and June, or a combination of one 25 and one 50 bp move) rose to 59 percent today from 41 percent yesterday.
- Odds that Fed Funds will be 50 – 75 basis points fell from 47 percent yesterday to 33 percent today.
December meeting expectations:
- Futures now place the greatest odds – 33 percent – on Fed Funds being 100 – 125 basis points by year end 2022. This implies 5 rate hikes of 25 basis points apiece (or some combination of 25 and 50 bp moves) in the 7 meetings over the rest of the year.
- The odds of six or seven 25 bp rate hikes rose to an aggregate 25 percent today from 9 percent yesterday (Fed Funds at 150 – 200 basis points).
- The odds of 3 or 4 hikes of 25 basis points apiece fell to 40 percent today from 58 percent yesterday.
Takeaway (1): along with these moves, it is also critical to note that Treasury yields rose today as well with 2- and 10-years making fresh 52-week highs. This market, which often reacts sluggishly (if at all) to news, heard Chair Powell’s message loud and clear.
Takeaway (2): Chair Powell’s reluctance today to commit to a specific pace of rate hikes leaves the market with considerable uncertainty. By our read of the data, there has not been a 50 basis point increase in rates at an FOMC meeting since 1994. We were in the market that year, covering auto stocks at the old First Boston, and we can tell you a 50 basis point rate hike doesn’t go down easily. The S&P 500 eked out a narrow gain that year (+1.3 percent total return), but only because of a late year rally.
Takeaway (3): does one want to commit fresh capital to US equities with the backdrop of an aggressive Fed and uncertainty regarding the economic outcomes of their policies? The answer, of course, depends on price: S&P level, Russell level, 10-year yields, etc. Our perspective remains unchanged after today. We continue to be wary here. In our experience it takes time for equity markets to fully discount significant changes in Fed policy. And, if nothing else, today’s Chair Powell press conference messaging fits the description of “significant”.
#2: US office occupancy continues to rebound, slowly. This is the latest data for the 10 largest US cities in terms of office space, courtesy of Kastle Systems:
Takeaway: 30 percent US office occupancy is the best in 4 weeks and would have been even better but for New York City’s 22 percent rate. That should improve in the weeks ahead as more large firms bring back workers. Final point: January’s low office occupancy rate may have an effect on this month’s Jobs Report, which will be out a week from Friday.
#3: The latest Investment Company Institute data (weekly, through last Wednesday) for mutual and exchange traded fund money flows shows:
- The bond fund buyers’ strike continues. Outflows for all fixed income funds totaled $1.4 billion, about the same as the prior week’s $1.2 bn. Even muni funds saw outflows ($118 million).
- US equity fund flows flipped negative last week (outflows of $5.8 billion) after a positive prior week (inflows of $7.3 bn). Non-US equity funds did see inflows ($3.6 bn).
- Commodity funds (mostly physical gold) had modest inflows last week ($388 mn), their fourth week of seeing fresh money come in the door.
Takeaway: it is remarkable to see fixed income outflows two weeks in a row and this speaks to the current mindset of US retail investors. Ordinarily, you’d expect to see inflows as affluent workers’ 401(K) contributions started to kick in at the start of a new tax year. That’s not happening. As we like to say, “everything happens at the margin in capital markets”. Fixed income mutual fund and ETF buyers have been a reliable marginal buyer for years. For the moment, however, they are absent and that points to higher rates until they step back in.