Top of the Street: low and limited rates, Yellen about inflation, a new Fed primer and news on consumer and corporate markets

Opinions on the FOMC dominated the Street last week. Yellen will speak on inflation Tuesday. The consumer looks strong. Corporates look correlated. Contributions from CoreLogic, the Fed, JPM and Milepost.

Markets: A low and limited range for rates
With the Fed on it’s way to unwinding its $4.2 trillion portfolio, inflation and fiscal policy take a stronger hold on rates. The Fed expects inflation to rebound from the summer’s low, but the market looks skeptical. The FOMC’s September dots imply a hike in December and three more in 2018. Market pricing, however, implies a nearly 70% chance of a December hike and only one more in 2018. It’s the Fed against the market, and the market in recent years has usually won. If inflation rebounds into 2018, US 10-year rates should rise toward 2.50% and the yield curve should flatten dramatically. The September FOMC lowered its estimates of final fed funds rates from 3.0% to 2.8%, further limiting the risk of higher long-term rates. US rates look likely to remain low and steady into at least 2020 and likely well beyond. As for fiscal policy, the focus will be on taxes. We’ll see how far DC gets on that. (Milepost).

Markets: Speech! Speech!
The dilemma facing the Fed will get airtime on Tuesday at noon when Fed Chair Yellen speaks on “Inflation, Uncertainty and Monetary Policy.” Yellen will deliver the keynote address to the annual meeting of the National Association for Business Economics in Cleveland starting just before noon. Since news reports over the weekend put her, along with Director of the National Economic Council, Gary Cohn, on the shortlist for the next appointment to Fed chair, it’s worth catching this one. This could lay out the framework the Fed is using to plot its next moves. The Fed always posts FOMC speeches here. (Milepost).

Markets/economy: A primer for QE and QT
When the Fed started quantitative easing, it put cash into the economy and lowered interest rates by buying securities. It kept cash in the economy by continuing to reinvest portfolio principal. And now it is starting to take cash out of the economy and raise rate by letting its Treasury debt and MBS mature. Sounds good, but if you ever wondered exactly how that works, the Fed has written a primer that goes through the mechanics. Since QE and QT look like permanent parts of the monetary policy landscape, it’s probably a required read if not necessarily a page-turner. The Fed primer is here. (Federal Reserve, Milepost).

Economy/Markets: Another gain for homeowner equity
Rising home prices helped lift homeowner equity by $766 billion from mid-2016 to mid-2017, according to CoreLogic, trimming the share of US homes worth less than their mortgages down to 5.4%. Homeowner equity has jumped $4.2 trillion in the last five years, more than double its starting mark. And the share of homes underwater has dropped more than 20 percentage points since its peak in 4Q09. Home equity rose in all states except New York, which saw a 0.3 percentage point drop. Add in the current low unemployment rate, and the US consumer balance sheet looks strong. The CoreLogic analysis is here. (CoreLogic, Milepost).

Markets: A tough market in corporates for relative value investors
Differences in yield spreads across issuers in the corporate debt market continue to narrow, according to JPMorgan, leaving sector performance more in the hands of macro forces than relative value. Dispersion in yields is at its lowest since at least the start of 2014, and correlation between sectors is high. Unlike equities, dispersion in corporate debt seems to narrow as performance rises. See JPMorgan, US Fixed Income Markets Weekly: Corporates, 22 Sep 2017. (JPM, Milepost).