Baker Market Updates: Lunch with Lester

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Lunch with Lester - Week in Review is The Baker Group’s Friday newsletter that provides community bankers with an accurate recap of the week’s economic developments. Authored by our seasoned Associate Partner Lester Murray, this insightful publication tracks Federal Reserve policy and provides useful credit market updates including: Weekly Economic Calendar; Fed Fund Futures; Treasury Yield Curve; Agency Spreads; MBS Spreads; Municipal Spreads; MBS Prepayments; and FHLB Advance Rates. 


June 7, 2019

It’s been said by many that the key to happiness is having low expectations. Well, the expectation of having added 175k new jobs to Non-Farm Payrolls last month wasn’t nearly low enough, it appears, but bond investors are happy anyway. This morning, the Bureau of Labor Statistics reported that only 75k new jobs were created last month while the total for the previous two months was downwardly revised by 75k. So maybe the real key to happiness is actually low interest rates because that’s what this morning’s market reaction is leading us to. Read more.

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May 31, 2019

Readers of a certain age may recall those zany space-race days of the 60’s and 70’s. The futuristic lifestyle of The Jetsons was awaiting us all. Remember? We were promised jet-packs! Instead, we got cell-phones. They’re pretty handy, I guess, but when it comes to slipping the surly bonds of Earth, well, I’d rather have a jet-pack. More recently, we were “promised” inflation. Massive post-crisis fiscal stimulus, a zero-interest-rate-monetary policy, quantitative easing, along with tax cuts, would all conspire to spark what could ultimately prove to be raging, runaway inflation. Read more.

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May 24, 2019

Since publicly announcing its 2% goal for inflation in January 2012, 87 monthly reports of the Personal Consumption Expenditures Core Index have been published by the Bureau of Economic Analysis. If one were to review those reports, one would find five occasions when that goal was reached. Nevertheless, a review of the latest FOMC minutes released earlier this week, finds that the condition of low inflation that has existed since the goal was announced is still described as “transitory.” Summer vacation should be so transitory. Read more.

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May 17, 2019

Last week’s tariff and trade war banter continued into this week as equity and bond markets saw their fair share of volatility. This morning, stocks are down early as China has signaled a tougher stance in its trade war with the United States. The trade war is starting to hit home as many American farmers are expecting a farm aid package from the Trump administration to compensate for the economic damages. Major agricultural exports to China have been on a steep decline since early 2018. Read more.

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May 10, 2019

“Great Consumer Price Index just out. Really good, very low inflation! We have a great chance to “really rock!” Good numbers all around.” – 5/10/2019 from President Donald J. Trump’s Twitter account. I will let you all decipher what that means for the overall economy. Who needs to read the Wall Street Journal when you can just refresh the ole’ Twitter feed for your up to date economic news? The consumer-price index, which measures what Americans pay for everything from breakfast cereal (shout out to Lucky Charms!) to car insurance (shout out to Jake from State Farm) rose by 0.3% in April, which was less than the economist’s expectations of 0.4%. Read more.

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May 3, 2019

It’s the first Friday of the month, and as is its custom, the Bureau of Labor Statistics released its Jobs Report early this morning. To the dismay of some economists, the report contained a few redactions in order to protect “sources and methods.” But, we already know that one of the methods used by the BLS is to conduct a survey of business establishments. Last month’s survey revealed that Non-Farm Payrolls grew by 263k and that’s a lot more than the 190k that pre-release estimates predicted. BLS methodology also includes a survey of households across the nation, and those results brought us a new and lower Unemployment Rate of just 3.6%; the lowest since 1969. Read more.

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April 26, 2019

The world’s been waiting for the skinny on America’s first quarter GDP and we learned this morning that the nation’s economic progress was considerably more plump than financial dieticians predicted. Weighing in at 3.2%, Q1’s annualized growth rate far exceeded the consensus estimate of 2.3%. But, monetary fitness is about more than just growth, and in this era of “the new normal,” some degree of inflation, like the consumption of “good” fat, is required. Unfortunately, despite the good news about growth, inflation went the other way. If the 1.8% “core” rate of PCE inflation was seen in Q4 as being too slender, which it was, it has become downright anorexic with Q1’s measure of just 1.3%. Read more.

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April 18, 2019

The Chinese made news this week when they announced that their economy’s first-quarter growth wasn’t as slow as it might have been. That, along with a whole lot of fiscal and monetary stimulation, also meant the year-over-year measure, at 6.4%, came in a little bit better than expected. In a different hemisphere, Germany made news of a different kind when its Economy Minister cut that nation’s growth forecast for 2019 in half. Again. The previously forecasted 2.1% performance expectation had already been reduced to 1% earlier this year, and on Thursday, was further lowered to just half of that. Read more.

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April 12, 2019

The unredacted minutes of the FOMC’s March meeting were released this week and the evidence of collusion between the hawks and the doves could not be more obvious. Okay, maybe it’s just be a coincidence that nobody wants to raise rates anymore, but to most observers, the poorly disguised conspiracy is a clear-cut effort to obstruct tightening. A slippery slope to wander. As a clever smokescreen, the minutes also revealed that rates “could shift in either direction based on incoming data”, thus reassuring all Fed-watchers that no one is conspiring to promote disambiguation. Read more.

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April 5, 2019

Remember when the monthly Jobs Report was a really big deal? Remember when people would come in extra early the first Friday of each month just to make sure they didn’t miss the big “scoop?” Remember when it was okay to give a hug to someone who was having a bad day? Well, based upon all the attention it receives, one supposes the Jobs Report is still a big deal. As for the hugging thing, we’ll just limit our embraces to this morning’s Employment Report from the BLS. In it, we learned that 196k new paychecks were embraced last month and the same 3.8% of the labor force that didn’t get to do that in February, didn’t get to do that in March, either. Read more.

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March 29, 2019

“The blues is my business, and business is good.” When Etta James first sung those lyrics, she probably didn’t have Teresa May in mind, but she might have. Today’s the day when the United Kingdom was supposed to be leaving the European Union, but that’s not going to happen; not today. In a gesture more suited to the opening week of Major League Baseball, the hapless Prime Minister offered to take one for the team. Earlier this week, Mrs. May told leaders in Parliament that she would resign if they would just vote for her Brexit deal. That particular plan has been defeated twice already, but she is nothing if not committed. Read more.

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March 22, 2019

Spring has sprung and the Fed’s garden plot has a new crop of dots! Like the first daffodils of a new season, seventeen new rate “forecasts” emerged from winter’s long dormancy after the FOMC’s latest meeting concluded, fittingly, on the very day of the vernal equinox. Many gardeners were surprised to learn that eleven of the Fed’s flowers don’t want to be anywhere other than where they are right now, and markets have interpreted that to mean that 2019 will bring no changes in the policy rate. So, while the crocuses and hyacinths are waking up, there is a growing concern that our economy is headed for hibernation. Read more.

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March 15, 2019

Yet another week of intense negotiations, and still no definitive trade deal with China. Even though signs of progress are uneven and the President has tempered his optimism, both sides are certainly doing their best and, no doubt, giving it the ol’ college try. But, as we’ve learned this week, the ol’ college try isn’t what it used to be and plans for a late-March, Mar-a-Lago, celebratory keg party are up in the air. Read more.

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March 8, 2019

Serious anglophiles might recall an observation once made by two-time Prime Minister Benjamin Disraeli. The eclectic, nineteenth-century statesman and novelist noted “There are three kinds of lies: lies, damned lies, and statistics.” And since the iconic Londoner passed away in 1880, he couldn’t have been talking about this morning’s Jobs Report; or could he? Read more.

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March 1, 2019

Patience young grasshopper. That was the theme this week as Jerome Powell channeled his inner Caine to deliver his semi-annual testimony to Congress. Citing challenges to domestic and global growth, the Chairman used his even-tempered equanimity to assure and reassure lawmakers and investors that the central bank will be able to exercise its forbearance with aplomb while making adjustments to future policy. In a speech last night to the Citizens Budget Commission in New York City, he also said that “the economy is in a good place.” Read more.

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February 22, 2019

Can a leopard change its spots? Ancient prophesy tells us no, but those ancient prophets didn’t know Jerome Powell. As a participant in a panel discussion sponsored by the American Finance Association on January 9, 2017, Mr. Powell proclaimed “it is not the Fed’s job to stop people from losing, or making, money.” That was before he replaced Janet Yellen at the head of the big, shiny table and before violent market volatility reared its ugly head at the end of 2018. Read more.

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February 15, 2019

While stopping short of declaring an emergency, Federal Reserve Governor Lael Brainard disclosed yesterday that she favors putting an end to the central bank’s process of balance sheet reduction sometime this year. The normalization exercise began in late 2017 and since that time, the combination of partial reinvestment cessation and carbohydrate reduction has trimmed the balance sheet down to a svelte $4 trillion from its post-crisis peak of around $4.5 trillion. Read more.

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February 8, 2019

With apologies to both William Shakespeare and John Steinbeck, now is the winter of our discontent; at least our economic discontent. Earlier this week, Janet Yellen mused that the central bank’s next rate move could well be a cut and not a hike. Jim Bullard, President of the St. Louis Fed, told reporters yesterday that the Fed’s last rate hike may have pushed the policy rate into “a restrictive setting” and cautioned “We are putting downward pressure rather than upward pressure on inflation.” Jerome, are you listening? Read more.

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February 1, 2019

Jerome Powell has figured out why the caged bird sings. Interest rates are high enough; maybe too high. And the fearful trill of the doves on his committee is finally being heard. Until this morning’s Jobs report, the week’s big news centered around the FOMC’s first meeting of the year. After December’s fourth rate hike of 2018, ill-advised in the minds of many, investors were looking for signs that our central bankers were, as advertised, actually being driven by the data. They got more than hints. Read more.

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January 25, 2019

We’ve all heard the old saying “What you don’t know can’t hurt you.” Were that true, our state of economic health would be unquestioningly robust. With each passing day of the partial government shutdown (PGS), the list of postponed data reports grows ever longer. This is becoming extremely inconvenient for a data-driven Fed that’s not getting all the data. Until someone turns the lights back on at the Commerce Department, we’re all in the informational dark. The FOMC’s job is tough enough, and with the partial shutdown, the Committee is flying partially blind. Read more.

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January 18, 2019

With a long, holiday weekend awaiting most Americans, prudent travelers might want to reconfirm their reservations before getting on the bus. One never knows when plans might change. But, travel arrangements aren’t the only things subject to sudden revision. It was reported yesterday afternoon that Administration officials were considering the possibility of lifting and/or cutting some of the trade tariffs that have been imposed upon Chinese imports. Read more.

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January 11, 2019

What do a Supreme Court case from 55 years ago and the FOMC have in common? Well, maybe more than one might think. In Jacobellis vs. Ohio, a 1964 lawsuit about a racy movie shown in Cleveland Heights, Justice Potter Stewart got the assignment to write the opinion for the majority. The Court ruled against Ohio and overturned the State’s decision that the film was obscene. Read more.

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January 4, 2019

Even before William Tell stood before an archer’s arrow and had one shot off the top of his head, apples have played a big role in myth, legend, and folklore. An apple even helped Isaac Newton invent gravity. Daughters are the apples of their fathers’ eyes and for sons, the apple doesn’t fall far from the tree. God didn’t make the little green ones, and thankfully, one bad one won’t spoil the whole bunch. Read more.

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December 28, 2018

It may only be the fourth day of Christmas, but it’s the seventh day of the partial government shutdown (PGS). While we all know that Four Calling Birds are the appropriate gift for the former, it’s unclear what is traditionally suitable for the latter. The good news is, the Grand Canyon is open for business, and that includes the gift shop. Read more.

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December 21, 2018

Christmas has a new Grinch, and his name is Jerome. As Chairman of the FOMC, Mr. Powell has gotten a lot of grief since his post-meeting press conference on Wednesday. Does he deserve it? The announcement of the central bank’s ninth quarter-point rate-hike of this cycle should not have been a surprise to anyone, and it wasn’t. So, why did equity markets react like they found a lump of coal in their stockings? Well, it wasn’t so much about what the Fed Chairman did, it’s about what he said. More precisely, it’s what he didn’t say. Read more.

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December 14, 2018

Gift-givers still have eleven shopping days until Christmas, but lawmakers are only left with a week to produce a workable spending bill if a partial government shutdown is to be avoided next Friday. This is just one of several issues for investors to contemplate as the FOMC prepares for its final meeting of the year amid signs of a globalgrowth slowdown and an unclear resolution to the China-U.S. trade war; the tone of which seems to vacillate between positive and negative on an hourly basis. Read more.

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December 7, 2018

When the outcomes produced by reality fall short of anticipated results, which side of the desired equation is off? Reality tends to be immutable and probably undeserving of any blame. On the other hand, forecasting economic data is always dodgy and this morning’s monthly Jobs report from the Bureau of Labor Statistics (BLS) serves as a reminder of just how dodgy. The 155k gain in Non-Farm Payrolls was well short of the 200k that market surveyors were looking for. The 3.7% Unemployment Rate remained unchanged, as did the 62.9% Labor Force Participation Rate. Read more.

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November 30, 2018

There was a time in the industrial evolution of America when Wall Street was guided by an ironclad axiom: As General Motors goes, so goes the nation. The Honda Accord, in conjunction with a few other things, long ago invalidated that dogmatic domestic dictum. Good thing, too, because GM’s announcement this week that it will be firing over 14k workers might just be a sign that things aren’t going so well for the tax-payer subsidized auto maker. Read more.

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November 23, 2018

“Over the river and through the woods” would hardly describe the route taken by some financial markets this week. But, “through the guardrail and into the ravine” does not conjure up a cheerful holiday image; despite its being closer to the truth. Maybe some of these equity investors just can’t handle the truth. Maybe they need someone on that wall; that wall of worry that continues to darken economic prospects that, until very recently, seemed so bright. Read more.

November 16, 2018

As the week’s caravan of economic data reached investors’ radars this week, some were expecting to see some evidence of the long-awaited inflation invasion. Has it arrived? According to the Bureau of Labor Statistics (BLS), inflation measures are on the rise, but those measures still fall a little short of reaching invasion status. In October, the Consumer Price Index without food and energy rose by 0.2% and that pretty much matched market expectations. It also brought the year-over-year rate to 2.1% and that was actually down a tenth from the prior month. Invasion? Not just yet. Read more.

November 9, 2018

If President Trump doesn’t want to take economic advice from Fed Chairman Jerome Powell, maybe he will be more receptive to Jerome’s counsel regarding public relations: don’t fight with reporters at press conferences. Mr. Powell’s next press conference won’t be until December 19th where he will likely be explaining and defending the 9 th rate hike of this cycle. If market participants needed affirmation of that event’s likely occurrence, it was provided to them by the statement that J.P. and his minions issued yesterday upon the completion of the FOMC’s penultimate meeting of the year. Read more.

November 2, 2018

As Americans prepare to give back the daylight they’ve been saving since March, the Bureau of Labor Statistics announced that a lot more of us have a reason to rise and shine come Monday morning. In today’s Employment Report for October, the Bureau of Labor Statistics (BLS) reported that Non-Farm Payrolls increased by a much larger-than-expected 250k. For those that attach significance to the Unemployment Rate, it remained unchanged at 3.7% while the Labor Force Participation Rate recorded a two-tenths rise to 62.9%. That is significant. Read more.