Morning Report: Jerome Powell leaves further rate hikes on the table

Vital Statistics:

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are up for once.

Jerome Powell’s speech yesterday was interpreted as hawkish despite some sentences that could be considered dovish.

Turning to monetary policy, the FOMC has tightened policy substantially over the past 18 months, increasing the federal funds rate by 525 basis points at a historically fast pace and decreasing our securities holdings by roughly $1 trillion. The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation. Given the fast pace of the tightening, there may still be meaningful tightening in the pipeline.

My colleagues and I are committed to achieving a stance of policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective. We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.

Along with many other factors, actual and expected changes in the stance of monetary policy affect broader financial conditions, which in turn affect economic activity, employment and inflation. Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.

Unfortunately, bond market sentiment is so awful right now that even neutral data / comments is considered bearish. This is often typical at the end of bear markets. The markets seemed to seize on the comment that “monetary policy is not too tight right now.”

The last month has seen an extraordinarily heavy amount of US issuance ($580 billion in the past 30 days) which works out to be an annualized pace of $6.9 trillion or about 3.8x 2022 issuance. The last month’s issuance probably won’t be repeated, although it pushed 10 year yields to multi-decade highs.

The punchline: As long as the economy keeps slowing, the Fed is done. If that changes they might have to hike some more.

The Atlanta Fed’s GDP Now estimate for Q3 is still above 5%. To me that doesn’t square with any of the other data we are seeing (Beige Book, ISM, consumer sentiment) but it has remained exceptionally high ever since a meh housing starts number in mid-August. I wonder how much this model is influencing the Fed and whether something is off – 5.4% GDP growth is ridiculously high, and the economy doesn’t feel ridiculously strong.

Western Alliance announced earnings yesterday which came in above expectations. EPS was up marginally from Q2, but down YOY based on higher interest expense and non-interest expense. Tangible book value per share increased on a QOQ basis. Provisions for credit losses decreased while charge offs increased slightly.

The office portfolio consisted of about 5% of loans, in mainly suburban locations. Only 6% of the portfolio has an LTV over 70. The conference call is at noon today, however the stock was up 3% in the aftermarket.

Job cuts continue in banking, with the top 5 lenders cutting 20,000 jobs so far this year. Wells and Goldman have led the charge.

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