The Fed looks likely to stay the course this week, leaving the market to speculate about a shift in Fed reinvestment sometime in 2018. The NY Fed has a novel spin on consumer confidence, with others weighing in on housing and commercial real estate. Contributions from Ben Bernanke, CoreLogic, GS, JPM.
Markets: FOMC preview
The FOMC should repeat its outlook for a ‘gradual increases’ in the funds rate on Wednesdaybut stop short of signaling a move at the next meeting in March, according to JPMorgan. Moderate GDP growth, low unemployment, slowly rising capital investment and inflation all keep the Fed on track. The Fed should see the risks to its outlook as ‘roughly balanced.’ And while the Fed could talk about reinvestment and the size of its balance sheet, it probably will not. No press conference, no dots this week. See JPMorgan’s US Fixed Income Markets Weekly, 27 Jan 2017. (JPM, Milepost).
Markets: Planning for a shift in Fed investment policy
Talking about tapering has become the latest parlor game. The Fed has given itself plenty of room to maneuver by noting that any shift in the Fed balance sheet will only come after “normalization of the federal funds rate is well under way.” Fed staff simulations suggest that would mean funds between 1% and 2%. The NY Fed’s December survey of primary dealers showed the Street expects that to happen by mid-2018. The Fed would almost certainly taper reinvestment of MBS principal, possibly include some Treasury reinvestment, and keep tapering steadily unless rates moved up too quickly or some other event intervened. The balance sheet likely declines from its current $4.4 trillion by $1 trillion to $1.5 trillion and then stops. If the White House replaces Yellen in January 2018, the unwind could come sooner, move faster or both. Par MBS spreads could widen by 25 bp, according to JPMorgan. Putting more MBS and its attendant risks on private balance sheets should also push up market volatility. A view on Fed reinvestment from Ben Bernanke is here. See JPMorgan’s The Fed’s Undoing Project: Thoughts on a smaller SOMA, 27 Jan 2017. And see Goldman Sach’s US Economics Analyst: Fed’s Balance Sheet Back in Focus and Goldman’s The Mortgage Trader, 27 Jan 2017. (GS, JPM, Milepost).
Markets/economy: Parsing consumer expectations
While many surveys show consumer confidence surging since the November elections, the NY Fed has a surprising theory: a change in the mix of consumers willing to respond. The NY Fed’s own consumer survey found little change right after the election, but its sample includes a large set of repeat respondents. The NY Fed did find higher expectations among repeat respondents in counties that voted Republication in the last two elections and in counties that flipped from Democratic to Republican. But expectations among repeat respondents in counties that voted Democratic dropped. Respondents new to the survey, however, were the most optimistic of all. The analyst speculate that people made optimistic by the election were more willing to participate when invited. That could explain the new confidence in surveys that contact a new set of respondents each month. The NY Fed post is here.
Markets: Cash and distressed home sales decline
The share of homes bought for cash last October declined to 32%, down 3% from the year before and 15% from the peak in 2011. The declining share reflects a steady drop in REO, which often trade for cash, rising home prices, which puts some cash sales out of reach, and some loosening in financing. The highest shares tended to come in the East, the lowest in the West. At its recent pace of decline, the cash share should hit its pre-2008 level of 25% sometime in 2018. The Corelogic post is here.
Markets: Hotel CRE
The hotel business has done well since the 2008 financial crisis, but JPMorgan sees some signs of softening. Recent weakening in revenue growth, occupancy and valuations, the bank writes, “are likely to be exacerbated by the expansion in room supply that is slated to occur over during the next few years.” For lenders, older loans secured by hotels should have a value buffer built in but newer loans are likely to work thinner. See JPMorgan’s US Fixed Income Markets Weekly, 27 Jan 2017. (JPM, Milepost).