Fed Policy is Working!

Stocks opened higher this morning, capitalizing on yesterday’s positive reversal. At the moment, the Dow is up 50 points and the S&P 500 is up .4%. Over the past week the VIX fear gauge has fallen to 29.5 from 31. Gold and oil are both down today. And the bond market is clearly in rally mode. Softer economic data (see below) caused bond traders to re-think Federal Reserve rate hikes. After all, those planned rate hikes are aimed at slowing demand throughout the economy in order to bring down inflation. The policy might already be working.

The number of new home sale transactions plunged nearly 17% in April due to low affordability and rising mortgage rates. The pace of sales hasn’t been this anemic since the early part of the Covid Crisis. Bloomberg News ways this is a “sign that the Federal Reserve’s interest-rate hikes are starting to cool the overheated housing market.” So yes, the housing boom is “finally reaching its limit,” but isn’t that what we wanted? Analysts expect the market to sort of stagnate rather than crash. After all, we still have a structural shortage of housing and the massive millennial generation is now at peak home-buying age. Finally, many Americans have refinanced at exceedingly low mortgage rates so for-sale inventory isn’t expected to surge.

According to S&P Global, US business activity slowed this month. Preliminary surveys of corporate purchasing managers show weaker activity among both manufacturing and service sectors. I should point out that business activity is still growing, just not as fast. Consumer spending appears to have finally been impacted by high inflation, especially among service providers. Go figure. Hotel rates in Hawaii are up more than 100% compared with pre-Covid levels. According to CNBC airfare is up 25% from a year-ago. People aren’t going to put up with that for long. And on the retail goods side, demand is slowing just as we’re seeing signs of improving global supply chains. Wal-Mart, Kohl’s, Nordstrom and Target all reported inventory growth of 20-40% from year-ago levels. They’ll be working off that inventory for the balance of the year, and that probably means price discounting.

Business spending on long-lived equipment & machinery also slowed a bit last month. According to the Census Bureau, new orders grew .4% vs. .6% expected. March orders were also revised lower. Over the past year, growth in new orders slowed from 23% to 6%.

So it seems the economy is reacting very quickly to the removal of government stimulus and Fed rate hikes. Famed investment author Jeremy Siegel says US money supply (i.e. bank deposits, CDs and money market funds) just posted the second largest month decline in more than 60 years. That’s essentially the opposite of stimulus. He calls this a “shocking statistic” suggesting that financial conditions are tightening quickly. The Fed needs to be very careful or they’ll go too far and push the economy into recession.