Can Fed Help the Economy to Avoid Recession?

FED in the spotlight

The Fed’s “minutes” are due out at 1 p.m. CST today and most expect they will indicate additional 50-basis point rate hikes coming up in both the June and July meetings. The minutes could also offer more details on the Fed’s balance sheet reduction plan. There are some worries about liquidity in the bond markets later down the road as the Fed’s monthly reductions increase, so insiders will be looking for clues as to how they might accommodate that.

U.S. Fed Chair Jerome Powell yesterday noted that high inflation and economic weakness overseas could derail the central bank’s efforts to avoid a recession.

Powell has been promising that the Fed will be able to tighten financial conditions enough to cool inflation without significantly denting growth or causing unemployment to go up, aka deliver a “soft landing.” In an interview yesterday, however, Powell said economic woes in the EU and China in particular will make it much more difficult to deliver that result. Powell also said that if inflation fails to ease in coming months, “we’re prepared to do more,” which some Wall Street insiders take to mean that a 75-basis point hike is a possibility.

Economic data

Investors are extremely anxious to see the PCE Prices Index on Friday. The Core PCE, one of the Fed’s favorite inflation gauges, dropped back to an annual rate of 5.2% in March versus 5.3% previously .

Stock bulls overall are having a tough time finding a major upside catalyst especially as the multiple headwinds have begun to inflict damage on corporate earnings.

Weaker retailer outlooks the last couple of weeks have also been underpinning concerns that the U.S. economy is headed toward a recession. Most retailers are walking back forward guidance as they struggle against hire costs for wages and transportation, ongoing supply chain fallout, and changes in spending habits as consumers adjust to inflation.

Even some of the biggest names like Walmart and Target are struggling. In fact, there are report circulating that Amazon is talking about sub-leasing +10 million sqft. of its retail space. Keep in mind, Amazon stock has given back all of its pandemic gains. While the US consumer has seen -$9 Trillion of US household wealth vanish in the past few months. At the same time we are starting to see new home sales fall off a cliff.

Data released yesterday showed the sales of new US homes plummeted last month by the most in nearly nine years, dented by the combination of high prices and a steep climb in mortgage rates. Purchases of new single-family homes decreased -16.6% to an annualized 591,000 pace, the weakest since April 2020, basically the height of the covid scare. The median new home price soared nearly +20% from a year ago to a record $450,600. There were 444,000 new homes for sale as of the end of the month, the most since 2008. However, very few of those had yet to be completed. Of the total 444,000 new homes on the market in April, just 38,000 were finished.

Houses under construction made up +65% of the inventory, with homes yet to be built accounting for about 27%. The backlog of homes waiting to begin construction is at an all-time high thanks to material shortages and higher input costs. Bottom line, new home sales declined in all four US regions, including by double digits in three.

I should note, new-home purchases account for about 10% of the overall market and are calculated when contracts are signed. They are considered a timelier barometer than purchases of previously owned homes, which are calculated when contracts close.

As for today’s corporate earnings, Dick’s Sporting Goods, NVIDIA, Snowflake, Stellantis, and Williams Sonoma are scheduled to report.