I haven’t traditionally watched the CME FedWatch tool to see what expectations are for Fed rate cuts – an occasional glance. Now I am watching it everyday–I think because my point of view has been so contrary to the general view out there. Simply I have not seen data that has consistently screamed ‘we need a rate cut!!!’ Yes inflation is coming down, but remains above the Fed’s target. Employment has slowed a bit from a year ago, but remains decent. Is there pain in real estate and in the banking sector–yes of course there is, but this certainly should have been expected at some point in time.
Anyway–the CME FedWatch tool is showing a 59.5% chance now of a rate cut at the March FOMC meeting–down from 70%. The tool shows a 2.6% chance of a rate cut in January–fat chance.
Yesterday markets were a bit soft-this morning equity futures are soft. Maybe markets are going to slowly adjust to ‘higher for longer’ interest rates? We haven’t seen huge volatility for a long, long time–remember when we would see equity markets move 1% daily? They don’t happen often anymore–I am fine with that–just pay me my interest and dividends on the 15th or 30th–I’m happy.
Yesterday I did nothing at all. I think I mentioned previously that February and March will bring giant sized maturities of CDs in our accounts and I have no idea at this moment where that cash will go. Some of my favorite positions are ‘full up’–some of my ‘sock drawer’ holdings have room to add shares, but the yields are below my target (7%) which means I need to balance these with higher risk issues. I really need to do more due diligence to prepare for the next 2 months.
Today we get retail sales numbers for December–a number that will be watched closely and then we get the Fed Beige Book release–we will get anecdotal points of view from Fed regions from this. Also we have 3 Fed yakkers–we’ll see if they are trying to tamp down rate cut expectations–Fed yakker Waller certainly did so yesterday we he spoke.
Well we have been getting earnings reports from the big banks, but I am most interested in the small bank reports. While I exited most of my small bank holdings (too early of course) I still have a couple holdings left and thus have an interest.
I’ll be looking for new allowances for loan losses and commentary on the commercial real estate segment from these banks–this would include any issues with multi family lending which seems to be a favorite of the small community and regional bankers.
It is likely we will see some commentary on the special assessments from the FDIC since all bankers are paying these because of previous bank failures and no doubt we will find out how their net interest income margins are holding up. I have some concerns that these banks have been kicking the can down the road on some bad loans–renegotiating etc ‘hoping’ for a miracle. We’ll see.
Most of the small banks will be reporting on the 23rd, 24th and 25th.
Well time to get another trading week underway. Last week we had the consumer price index (CPI) and the producer price index (PPI) released with the CPI showing inflation slightly hotter than expected and the PPI showing cooling inflation at the producer level. In spite of the numbers equities moved higher.
The S&P500 rose–this week by 1.8% from the previous Friday. The index traded in a range of 4699 to 4802 before closing at 4784.
The 10 treasury closed the week at 3.95% and traded in a range of 3.92% to 4.07%. Even a hot CPI couldn’t drive rates into the 4%s on the week. The 10 year treasury seems convinced ‘hot prices’ are in the rear view mirror.
The CME FedWatch tool predicts a 68% chance of a Fed Funds rate cut in March (and predicts a 5% chance of a cut yet this month). The tool had been between the low 60’s and low 70’s this week as various pieces of economic data were released.
This week we have lots of economic data–although the release of the Fed Beige book on Wednesday may garner the most attention as we get some anecdotal information from each Federal Reserve area.
The Fed balance sheet rose last week by $5 billion. The run off of the balance sheet has fallen behind the $95 billion/monthly rate target – I suspect we will see a giant drop in the next couple weeks to get it back on track.
The average $25/share preferred stock and baby bond moved nicely higher last week–up by 19 cents. Investment grade moved 27 cents/share higher, banks were up 30 cents, CEF preferreds were up 8 cents, mREIT preferreds up 3 cents higher and shippers up 22 cents.
Last week we had 1 new income issue priced–Eagle Point Credit Company (ECC) priced a new term preferred with a coupon of 8% and a mandatory redemption in 2029.
I hadn’t noticed that CHS released their earnings on Wednesday for teh quarter ending 11/30/23.
Earnings were off in most sectors of the business from versus the year ago quarter–but that quarter was a real blow out to the upside.
Overall net income was $523 million–which continues to represent stellar earnings, but we all know earnings can be quite volatile in the energy and ag sectors.
Well yesterday we got some consumer price index (CPI) numbers that we hotter than forecast – markets reacted strongly – for about 90 minutes and then yawned. The S&P500 fell a bit–but nothing of significance, while the 10 year treasury fell 5 basis points to close at 3.98%. Right now equity futures are falling with the S&P500 off by about 1/3%.
Today we have the producer price index (PPI)–forecasts are for numbers that are up .1%. Is there a reason to think markets will react strongly – nope. In fact after the release of CPI yesterday the odds of a rate cut by the Fed in March rose to 70% – hope springs eternal I guess.
Maybe a bigger issue to markets at this moment is the U.S. and UK airstrikes in Yemen last night which has served to drive up crude oil prices by $2-3/barrel. The escalation of issues in the Middle East could easily drive oil prices up by $10-$20/barrel–or more. Let’s hope this situation settles down-for lots of reasons, but certainly for economic reasons–i.e. shut down of the Suez canal.
Last night Eagle Point Credit (ECC) priced a new issue of term preferred at 8%. This is a monthly payer and will trade under ticker ECCF. Egan-Jones has the issue at BBB. The pricing term sheet is here.
I did nothing yesterday–no buying or selling. Accounts are sitting just below record levels–daily movements have been minimal–movements are primarily around dividend and interest payment dates. I have very large maturities of CDs in February and March–I have concerns that I will be able to deploy these funds in a timely and responsible fashion, but given that I can earn 5.3% in a money market fund I have a little grace period to figure it out.