Daily Market Color

Markets React to Hawkish Fed Comments and Weak Housing Data

Jeff Davenport

US stocks traded close to unchanged, the dollar rallied, and Treasuries sold off marginally as investors reacted to a variety of hawkish comments from Fed officials.  Richmond Fed President Lacker (hawk, non-voter) said that inflation has been held down recently by falling oil prices and the strong dollar, and that inflation expectations remain “well-anchored”.  Lacker believes that after the price of oil bottoms out (which it already may have done), headline inflation will move “significantly” higher, thus achieving the Fed’s 2% target.  Lacker is a known hawk who dissented in September and October in favor of an earlier liftoff of interest rates from zero.  San Francisco Fed President Williams (hawkish, non-voter) was also bullish on the US economy, declaring it’s “looking great”.  Williams said he would support a rate hike in April or June if the data continues to perform as expected, and said the Fed would be raising rates at a faster pace if it weren’t for global factors.  He did, however, support a pause at the March FOMC meeting to ensure the recent data was sustainable.  Finally, Atlanta Fed President Lockhart (dovish, non-voter) said a rate hike is possible as soon as April.  Lockhart sees “sufficient momentum evidenced by the economic data to justify a further step” in policy normalization.  Lockhart believes the economy is approaching full employment and that inflation will approach the Fed’s target as prices firm in the second half of 2016.
Not a lot of US economic data released today with the exception of the existing home sales report, which showed home resales fell sharply in February.  Sales fell 7.1% to the lowest level since November, widely missing economist expectations for a 3.0% decline.  Home sales have been volatile in recent months, in part due to new mortgage regulations introduced in October.  Low inventory levels continue to weigh on housing, but the outlook is still positive as the sector continues to be supported by a firming labor market, which is starting to show signs of wage growth.

All three major US stock indexes are trading within 0.1% of Friday’s close, while Treasury yields and swap rates are 3 – 4 bps higher across the curve.

Jeff Davenport

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