22 May 2022 Europe | Global | Monetary Policy & Inflation | US

Fed Minutes Could Hint At Q4 MBS Sales

By Dominique Dwor-Frecaut and Henry Occleston
7 min read

US Key Points

Fed minutes could hint at MBS sales in Q4.
CBO budget outlook likely to show higher deficit than initially projected.

Europe Key Points

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Another busy week for central bank policy maker comments, with comments from various ECB and BoE speakers.
Survey data across the Eurozone and UK will be the main data draw, with the PMIs (Tuesday) likely to generate most reaction.
UK public finances are released on Tuesday.

US

Fed

There was more hawkishness from Fed speakers this week. Powell and George both said that they were not taking the FOMC estimate of the neutral rate at face value and instead would need to see an actual inflation slowdown to slow the pace of tightening (see Powell Open to Terminal FRR at 8%…ish). Williams argued for bringing the real FFR back to zero within a year (though he did not cite which price index he was looking at). Harker talked of ‘a safe if not soft landing’. Mester could not rule out 75bp hikes beyond June-July.

This week, the Fed will publish its minutes which I expect will have an hawkish tone overall. The next big item on the Fed agenda could be outright sales of MBS. With the 30yr mortgage rate the highest since the GFC, mortgage refinancing is going to be limited and MBS redemptions are likely to fall well below the monthly redemption cap of $17.5bn during June-September and $35bn afterwards. At the same time, even though the residential real estate market is slowing, price increases are still in a 15 to 20% range depending on the index, against a benchmark 30yr mortgage rate that has remained at 5.25% for the past 3 weeks. More tightening is needed to cool the market.

Some participants e.g., KC president George, are keen to shrink the balance sheet fast and could be pushing for the measure. At the same time the doves e.g., Brainard, don’t see QT as important and could be happy to make this concession to the hawks.

Since the Fed likes to pre-announce its policy changes well ahead of time, I will be looking for initial hints in the minutes. An actual announcement could be made at the September or December meetings.

Other than that, the minutes are likely to convey support for 50bp at the June and July meetings, support for bringing the FFR to neutral by end-2022, hopes in a softish landing and the traditional, two-handed discussion of the economic and policy outlook.

As of this writing, Bostic, George, Powell and Brainard are listed as speakers.

Data

Retail sales and IP surprised on the upside. Existing home inventories are rising but much more slowly than in 2005-06.

Covid related hospitalizations have started to increase but at a much lower pace than confirmed cases. Risks of regulatory disruptions to businesses remain low as voters’ patience for such restrictions has been largely exhausted by the 2020-21 policy response to the pandemic.

Key data this week include:

CBO revised budget projections, the first revisions since July 2021. I expect them to project a bigger FY2022 deficit than the 4.7% of GDP published in July 2021 but with higher spending and revenues.
PCE: there is cope for upside surprise relative to consensus expectation for core at 0.3 MoM, in view of the core CPI print at 0.6% and of generally strong household demand
Personal spending and income: the consensus forecast imply a further decline in the savings rate which seems plausible in view of the pickup in non-housing household credit.
Durable goods orders: I see scope for a positive surprise to capital goods orders, a good proxy for equipment capex in the GDP, relative to consensus expectations of 0.5% MoM. My view is based on the strong capex momentum in the first estimate of Q1 GDP, as well as a possible rebound in economic momentum.
Q1 GDP second estimate: I will be paying close attention to revision to capex (non-residential investment) that was very strong in the first estimate at 9.2% YoY, another set of data pointing at resource pressures.
S&P PMIs, Chicago Fed national activity, Richmond and KC Feds business surveys: I agree with the consensus that generally sees slower activity as the economy is moving back to trend.
Retail inventories: excluding cars, the retail inventories/sales ratio increased sharply in March and I will be looking for confirmation of this trend, which has already been mentioned in the news medias.
Trade balance: I will be looking for a continued worsening of the non-oil balance trend.

Events/Political Developments

At of this writing, Tuesday Pennsylvania GOP Senate primary is still too close to call. Overall, candidates backed by former President Trump did well though they did not win every contest. This week is the Georgia primary, where the Trump-back candidates could struggle due to funding and to entrenched incumbents.

Links to New York Fed POMOs/TOMOs: Repos, Treasury, MBS, CMBS

Europe

ECB and BoE Speakers

It is a busy week for ECB speakers, with voices from across the dove/hawk spectrum on the wires. There is not a lot new that Monday’s hawks (Holzmann and Nagel) are likely to say. However, the possibility of Holzmann joining his voice to fellow arch-hawk Knot in proposing a 50bp July hike cannot be ignored. The market could respond strongly to such a move, but any moves to price above 25bp should probably be faded given that the proposition is very far from consensus across the ECB Governing Council.

More interesting voices will probably be heard later in the week, given that Tuesday sees the May PMIs, which will no doubt provoke some reaction. The expectation is for the readings to decline modestly across the board. Consumer sentiment surveys have thus far borne the brunt of the economic pain, so it will be interesting to see whether the business surveys can retain their relative positivity.

Elsewhere, April UK finances are released on Tuesday. Chancellor Sunak has so far retained pretty tight purse strings into the crisis. With the cost-of-living crisis continuing to build it is unclear how long he can retain this position. This week’s data will be important to watch for an indication of what headroom there is to spend more further down the line (temporary cuts to VAT and spending to offset fuel bill rises have been floated).