The Fed Decision Released Market Pressure
The Fed raised interest rates yesterday. The vote could have been a contentious 5-4 split, but it came in unanimous. That single-voice decision calmed markets. Futures had already priced in the hike, and the Fed went unanimously in favor of what markets expected. That gave markets confidence the Fed is watching inflation and paying attention to the markets.
For days the market sat coiled, like a beach ball held under water. The Fed event happened, the uncertainty cleared, and the ball got released. Wall Street likes the move. Mainstream may not, because it means higher mortgage rates, higher car loans, and pressure on small businesses and consumers.
Iran Talks and Crude Oil Add Fuel
President Trump said the U.S. is now in direct talks with Iran and near the end of the war. That pushed crude oil back down through $100. Yields followed crude lower, and the dollar is down. The mix of lower crude, lower yields, and a lower dollar is driving a solid stock recovery. E-mini futures are up 1.25%.
The current inflation problem comes almost entirely from a crude oil price shock. That shock is seeping into other parts of the economy and dominating CPI and PCE. If crude keeps dropping, inflation pressure should ease.
Where Rates Go Next
Markets always overshoot. At one point seven rate hikes were priced in, then rate cuts, and now three or four more hikes are built in. I do not think they will raise three or four more times. With the right moves in crude oil and yields, the next step could easily be nothing or a cut. Kevin Warsh did a strong job. He likely does not want to raise rates, but he had to acknowledge where the overall market sits. The goal is a careful return to the 2% inflation target while the economy and jobs stay strong. Stable prices help people the most, especially those least well off.
The Morning Data
Jobless claims stayed historically strong. First-time filers came in at 196,000, and continuing claims at 1.73 million. Any reading under 200,000 signals a historically strong labor market. These numbers pile up ahead of the unemployment rate at month's end.
Housing data came in soft. Housing starts, the count of new home foundations begun, dropped to 1.275 million. That is slightly above the prior month, but expectations were above 1.3 million, so it missed. Building permits, the paperwork for future homes, were a bigger miss at 1.394 million, down from 1.443 million the prior month.
The Philadelphia Fed manufacturing reading beat consensus but fell month over month, from 47.4 to 37.8. The Empire State reading also missed. One number means little, but Empire State and Philly Fed both dropping from the prior month points to a slowing trend.
