Markets amid hot inflation data and comments from Fed official

Dow fell 431 with significant selling in the last hour of trading, decliners over advancers 5-2 & NAZ lost 234.  The MLP index remained near 233 & the REIT index was off 3+ to the 399s.  Junk bond funds were weak & Treasuries continued to be sold.  Oil slipped a little in the 78s & gold gained 7 to 1852 following recent weakness (more on both below).

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Federal Reserve Bank of Cleveland Pres Loretta Mester said inflation remains too high & noted that she was open to raising rates by more than her colleagues wanted at their last monetary policy meeting.  The Fed “has come an appreciable way in bringing policy from a very accommodative stance to a restrictive one, but I believe we have more work to do,” Mester said.  “At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2%,” she said.  When the Fed met at the start of the month to deliberate on interest rate policy, it moderated the pace of what had been a torrid barrage of rate hikes & lifted its overnight target rate by a qtr percentage point, to 4.5-4.75%.  The Fed signaled more rate hikes are coming to help lower overly high inflation levels back to the 2% target.  Mester, who does not have a vote on the Federal Open Market Committee this year, noted she would have been open to a larger rate rise at the gathering.  “Setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5%,” she added.  Some other Fed officials have said in recent comments they're OK with smaller rate rises as they proceed toward an uncertain stopping point for the rate rise campaign.  But recent data showing that inflation didn't moderate as much as was expected at the start of the year has boosted the prospect the Fed may have to be more aggressive over time.  “It is welcome news to see some moderation in inflation readings since last summer, but the level of inflation matters and it is still too high,” Mester said.  The Jan consumer price index data, released earlier this week, “showed a jump in the monthly rate of overall inflation and no improvement in underlying inflation,” & it provided “a cautionary tale” for those who believed inflation is moving swiftly back to 2%.  Mester said “I continue to see the risks to the inflation forecast as tilted to the upside for a number of reasons.”  She also said “the transition back to price stability will take some time and will not be without some pain.”  The impact of Fed policy actions “will result in growth well below trend this year and some cooling off in labor markets, with slower employment growth and an increase in the unemployment rate from its very low level,” Mester continued.  This will cool inflation & wage pressures and “as a result, I expect to see good progress on inflation this year,” the official said.

Fed's Mester says more rate hikes needed to combat inflation

New US home construction slumped again in Jan to the lowest level since 2020 as elevated mortgage rates combined with pervasive inflation continued to cool demand.  Housing starts slid 4.5% last month to an annual rate of 1.31M units, according to new Commerce Dept data.  That is below the forecast for a pace of 1.35M units.  Applications to build, which measures future construction, were little changed at an annualized rate of 1.34M units.  Permits for the construction of single-family homes, which account for the biggest share of homebuilding, dropped 1.8%.  The data comes one day after the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, rose more than expected to 42, the highest reading since Sep.  Any reading above 50 is considered positive; prior to 2022, the gauge has not entered negative territory since 2012, excluding a brief – but steep – drop in May 2020.  The index has fallen to ½ of what it was just one month ago, when it stood at 81, although it has increased from a low of 31.  It peaked at a 35-year high of 90 in Nov 2020, buoyed by record-low interest rates at the same time that American homebuyers, flush with cash & eager for more space during the pandemic, started flocking to the suburbs.  The interest rate-sensitive housing market has borne the brunt of the Federal Reserve's aggressive campaign to tighten policy & slow the economy.  Demand has shown early signs of returning as mortgage rates continue to fall from a record high of 7.08% in Nov.  The average rate for a 30-year fixed mortgage dropped to 6.12% last week, according to data from mortgage lender Freddie Mac.  However, that remains significantly higher than just one year ago, when rates hovered around 3.69%.

Housing starts fall in January to the lowest level since 2020

Consumer debt hit a fresh record at the end of 2022 while delinquency rates rose for several types of loans, the New York Federal Reserve reported.  Debt across all categories totaled $16.9T, up about $1.3T from a year ago, as balances rose across all major categories.  Despite a decline in originations, mortgage balances increased to $11.9T, up about $250B from Q3 & about $1T from a year ago.  Originations for new home loans and refinancings fell to $498B, less than ½ where they were for Q4 in 2021 & a drop of about $135B from Q3.  Mortgage loans considered in “serious delinquency” of 90 days or more rose to a rate of 0.57%, still low but nearly double where they were from the year prior.  Auto loan debt delinquencies rose 0.6 percentage point to 2.2%, while credit card debt jumped 0.8 percentage point to 4%.  “Credit card balances grew robustly in the fourth quarter, while mortgage and auto loan balances grew at a more moderate pace, reflecting activity consistent with pre-pandemic levels,” said Wilbert van der Klaauw, economic research advisor at the New York Fed.  “Although historically low unemployment has kept consumers’ financial footing generally strong, stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” he added.  The rise in balances came amid an aggressive rate-hiking campaign from the Fed as it battled inflation running near its highest levels in more than 41 years.  Student loan debt also increased for the month, after staying flat during much of the pandemic amid gov-backed amnesty for borrowers.  The total balance hit $1.6T in Q4.  Auto loan debt edged higher, to $1.55T, while credit card balances rose to just shy of $1T.  The explosion in consumer debt came amid an ongoing increase in federal gov borrowing.  Total US gov debt now stands near $31.5T, up from $29.6T at the end of 2022, according to Treasury Dept data.

Consumer debt hits record $16.9 trillion as delinquencies also rise

Gold futures settled higher, shaking off early losses, with prices for the metal finding support as the $ eased back, with the ICE US Dollar index trading closer to the session's lows.  Strength in the $ had weighed on $-denominated prices of gold in the wake of yesterday's stronger-than-expected US producer price index & the consumer price index readings.  The reality is that gold prices will continue to fluctuate around data releases (jobs, inflation, growth, etc.) as investors continue to look for clues around the Federal Reserve's policy decisions & the possibility of a recession.  Gold for Apr rose $6 (0.4%) to settle at $1851 an ounce.

Gold Futures Give Up Early Losses to Finish Higher

Oil futures finished lower for a 3rd straight session.  The loss follows a more than 16M-barrel weekly increase in US crude inventories reported by the Energy Information Administration yesterday.  The supply side of the equation remains very bearish & will likely knock prices away from the top of the downtrend channel, especially if Chinese energy demand hopes are dampened.  US benchmark West Texas Intermediate crude for Mar fell 10 cents to settle at $78.49 a barrel.

Oil futures settle lower for a third straight session

Stocks fell while interest rates rose as investors parsed thru more hotter-than-expected economic data & hawkish comments.  The yield on the benchmark 10-year Treasury note rose to 3.84%.  And the premium of the yield on the 2 Year Treasury is a very big 80 basis-points above the yield on the 10 year note.  That's a strong signal of a coming recession, although it has been in place for months.

Dow Jones Industrials