In the wake of last week's strong economic data on Friday and follow-through weakness in overseas markets, traders are gearing up for additional Fed rate hikes. They figure they can get some sort of comment on those conclusions in a Q&A session with Fed Chair Powell today (previously scheduled) at the Economic Club of Washington. The event kicks off at 11am and runs through 1:30pm. There is no scheduled time for Powell, but we've heard 12:30 is a good possibility. Either way, the entire time frame will warrant vigilance. In its wake, markets may breath a sigh of relief if Powell doesn't acknowledge Friday's data the same way that a few other Fed speakers have in the past 24 hours.
How realistic is it for Powell to have some new reaction to one day's worth of econ data? Again, other Fed speakers have already acknowledged their surprise. The clearest example came from Kashkari this morning which we covered in detail in an update you can read HERE.
As said in that update, it's particularly notable to see Kashkari's comment on the strength of the housing market causing trouble for the Fed. This is a concern we've shared time and again with respect to the prospects for any significant rate rally. We feel the Fed is likely to push back fairly hard against "signs of life" in the housing market due to housing's role in stoking inflationary fires over the past 2 years. Worst case scenario, it prompts a revision to their plans to abstain from MBS sales for the time being. We're CERTAINLY not there yet, not expecting it any time soon, nor expecting anyone to bring is up as an option at this stage, but if rates were to continue to fall and housing continued to recover, we don't thing the Fed would have a problem pushing MBS vs Treasury spreads to even wider levels.
The following chart shows how MBS yields have fared against a 5/10yr Treasury blended yield for more than a decade. We had been recovering after blowing out to long-term highs last fall. At one point in the Bernanke years, we saw such levels as being a concern that the Fed would want to address by HELPING the mortgage market. With the current realities of inflation, the Fed may view such levels as a safer place to be for now.
To be clear, today is not about the mortgage market nor the Fed's mortgage-related intentions. Kashkari simply made a statement that aligned with a warning we hadn't heard anywhere else and it served as food for future thought--something to keep an eye on if certain scenarios play out. Today is all about whether Powell is on board with Kashkari's general vibe and/or the general notion that last Friday makes Fed officials say "this changes things..."