After a week that was nice and calm in all stock and interest rate markets we are looking forward to a new week to see what surprises it brings us.
Last week was characterized by interest rates trading between 2.80 and 2.90% as consumer and producer prices both came in as expected. Consumer prices were up 2.2% year over year and the core rate (less food and energy–this is for all who neither eat or heat their homes) up just 1.8% year over year. Producer prices were up 2.8% and 2.7% less food and energy year over year. All numbers were as expected. The 10 year treasury closed the week at 2.85%. The Fed balance sheet grew by $11 billion last week and for March has grown by $14 billion. This means that they need a runoff of $34 billion in the next two weeks to stay on a schedule of a reduced balance sheet of $20 billion monthly (assuming a linear month to month runoff–which it will not be). This likely keeps the floor under interest rates as demand should be reduced.
The other economic numbers we looked at, but apparently no one else is overly concerned with, is Consumer Sentiment from the U of Michigan which hit a 14 year high of 102. Potentially related to this are the numbers found in the JOLTS (job opening and turnover survey) report which showed a massive number of job openings in the U.S. Considering we are supposedly at “full employment” to have 6.3 million job openings would imply we are facing inflationary wage pressures ahead. So the consumer is feeling very good about their personal situation and there are jobs for all that want them. As we have seen in the recent employment situation report even though jobs are being created in large numbers folks are coming back into the work force–those that have left for years are coming back. So from a wage inflation perspective we have been fine as re-entry workers have kept wage pressures modest–for now–but this can’t go on forever–or can it?
Last week preferred stocks continued to move higher in price as the average price settled Friday at $25.17 which is a nickel higher that the week before. The number of issues trading at $25/share or lower ticked up to 190 from 187 the week before. I have a gut feel that we are looking at a peak in prices for the time being–no data to back this-just a gut feel–we shall see. The chart below visually displays what we think is a normal trend of overreaction, churning and then coming to senses. Prices fall sharply by 10-15% based upon fear of the unknown higher interest rates to come–then it is discovered maybe they won’t go so high followed by a recovery of a good portion of the prior losses (note shares went ex-dividend 3/13). We await the next overreaction.
Last week we had 2 new preferred issues begin trading. The Apollo Global Management 6.375% preferred. began trading and on Friday moved from the OTC grey market to the NYSE and closed at $25.
Pennsylvania banking company Tristate Capital announced a new perpetual fixed-to-floating preferred with an initial coupon of 6.75%. The OTC grey market ticker of TSCLL was announced late Friday and trading began Friday with shares closing at $25.30.
The CMS Energy long dated baby bonds with a 5.625% coupon began NYSE trading and after a slow start closed the week at $25.12.
For the coming week we have the FOMC meeting starting on Tuesday morning with the wrap-up Wednesday and an announcement and press conference at 2 pm (EDT) which will likely reveal a 1/4% Fed Funds rate increase. The new Fed chair will have his 1st news conference and this will be more dangerous to markets than the rate hike itself as a hawkish tone could send markets reeling.
Beyond the Fed meeting we have Leading Indicators reported on Thursday and Durable Goods reported Friday. The predicted range on both of these numbers is so wide as to make almost any report acceptable to the current markets.