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. 

 

August 23, 2019

Got a minute? Well, the Fed has several, and they were kind enough to share some of them with us this week. And just this morning, the Chinese were kind of enough to announce that they’re going to be sharing some tariffs of their own with us, too. The latter event shouldn’t really surprise anyone; that’s how trade wars work. But the recap of July’s FOMC meeting revealed that the divergence of perceptions among the makers of monetary policy is far greater than many had previously thought. But, if they’d really been thinking, they wouldn’t have thought that. Read more.

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August 16, 2019

The list of variables being blamed for this week’s extraordinary market behavior is long and varied. Trade tensions have become a reliable fall-guy when assigning responsibility for extreme volatility and upheaval. If that explanation is unsatisfactory, one can go with civil unrest in Hong Kong, or maybe economic contraction in the European Union. Policy mis-steps, negative interest rates, and the slope of the yield curve can also be included when rounding up the usual suspects. But, one inconvenient truth being overlooked in all the finger-pointing is the fact that there was a full moon this week. Read more.

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August 9, 2019

As a football-starved nation greets the first of many tedious and generally uninspiring preseason games, one wonders if the FOMC might benefit from the adoption of a similar warm-up period. Football teams do it to knock off a little rust after the off-season with workouts and practices designed to foster teamwork and promote unity. Players learn the new plays, brush up on the old ones, and coaches try to get everyone on the same page. Read more.

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August 2, 2019

“Ice is forming on the tips of my wings. Unheeded warnings, I thought I thought of everything.” If that quote sounds familiar, it’s because you’re still listening to Pink Floyd, like you should be, and not because Jerome Powell said it during his post rate-cutting press conference. But, he might have. The Committee’s quarter-point rate cut surprised almost no one, but the way Chairman Jay described it surprised almost everyone. With the current expansion cycle recently becoming the longest one in history, a near universal perception has been held that the current cycle of growth has entered its golden years and without some significant rate cuts, isn’t long for this world. Read more.

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July 26, 2019

Unlike another report that’s been in the news lately, today’s publication of second-quarter GDP does not speak for itself. This morning’s data release by the Bureau of Economic Analysis requires a degree of contextualizing, and it is within the Commerce Department’s purview to provide it. On its surface, the 2.1% flash estimate of Q2 GDP was better, by a half-percent or so, than many of the pre-release estimates. So, yes, the economy slowed in the year’s second stanza, but not as much as was feared. Read more.

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July 19, 2019

The hot and sultry “dog days of summer” are upon us. And depending on where one is, they’re here with a vengeance. But that old expression, like much of the communication coming from the Fed these days, is often misunderstood. The actual origin of the “dog days” description has more to do with astronomy than it does with meteorology. It just so happens that Sirius, the Dog Star, can be seen rising in the northern hemisphere following the summer solstice. But that doesn’t mean it’s hot everywhere. Read more.

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July 12, 2019

In 1958, William Phillips, a New Zealand-born economist, wrote a research paper in which he explored the hypothesis that there was a relationship between unemployment and inflation. He concluded that one does in fact exist, and that it is inverse. Thus was born the Phillips Curve. Yesterday, Jerome Powell, a non-economist born in Washington, D.C., told members of the United States Senate that “the relationship between inflation and unemployment has gone away.” Thus the death of the Phillips Curve. With all due deference to Yogi Berra, if Mr. Phillips were alive today, he’d be spinning in his grave. Read more.

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July 5, 2019

Despite the scant reporting about the details of last week’s Trump-Xi meeting at the G20, it was obvious to all last night that tariffs on Chinese fireworks have been thankfully avoided. Not to be outdone, the Bureau of Labor Statistics provided its own “rockets’ red glare” just this morning with the release of its Jobs Report for June. Unlike the thousands of celebratory pyrotechnic displays across the nation yesterday, the BLS bombshell does not appear to be a crowd pleaser. Read more.

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June 28, 2019

There’s no debating that all eyes are on Japan today as the G20 Summit begins in earnest. Well, actually it begins in Osaka, and the stars of the show are Donald Trump and Xi Jinping. Tomorrow’s planned luncheon between the two leaders will come on the heels of ongoing discussions between Chinese and American trade delegations as the world wonders what comes next. White House spokesmen were quick to dispel rumors that President Trump would be announcing new tariffs on Jerome Powell. Read more.

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June 21, 2019

Obrigado for nothing, Mario! Jerome Powell and his merry band of monetarists were all set to dominate the world’s financial stage this week. The run-up to the FOMC’s June conclave had tantalizingly teased market participants with the prospect of a possible rate cut; the first one in over ten years. But, Jerome and the gang got upstaged by their counterparts in Europe. At an economic forum held in Portugal, Mario Draghi, head of the European Central Bank, robustly reassured all concerned that the ECB stood ready to use all of the tools at its disposal to provide more stimulus to the EU’s flagging fortunes. Read more.

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June 14, 2019

A week of firsts, it was. For the three-point maestros from Toronto and the slap-shot specialists from St. Louis, their hard-won championships this week mark the only ones ever achieved in the histories of those venerable franchises. Many are now wondering if next week will bring another first; the FOMC’s first cut in its policy rate since December 16, 2008. That’s a long time, but is it long enough? Is it too long? The jury is still out on that one, but a lot of the evidence is already in. Read more.

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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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