Markets retreat while rates spike

Dow dropped 274 (well above early lows), decliners over advancers about 4-1 & NAZ was off 31.  The MLP index was about even in the 261s & the REIT index lost 6+ to the 371.  Junk bond funds were weak along with stocks & Treasuries continued to be heavily sold, bringing higher yields.  Oil rose in the 72s & gold retreated 11 to 2042 (more on both below).

AMJ (Alerian MLP Index tracking fund)

The average rate on the popular 30-year fixed mortgage crossed over 7% for the first time since Dec, hitting 7.04%, according to Mortgage News Daily.  It comes after the rate took the sharpest jump in more than a year Fri, after the Jan employment report came in much higher than expected.  Rates then moved up even more today after a monthly manufacturing report came in high as well.  Mortgage rates have been on a wild ride since the summer, briefly crossing to a 20-year high of 8% in Oct.  Rates then fell sharply, as investors saw more & more evidence that the Federal Reserve would end its latest phase of interest rate increases.  Mortgage rates do not follow the Fed directly, but they follow loosely the yield on the 10-year Treasury, which is heavily influenced by the central bank's impression of the economy at any given time.  “The rapid increase in rates over the past two days is actually not too surprising given the fact that the market was widely seen as overly optimistic on the Fed rate cut outlook. The Fed has repeatedly pointed to economic data having the final say in that outlook and data has been shockingly unfriendly to rates as of Friday morning’s jobs report,” said Matthew Graham, COO at Mortgage News Daily.  As mortgage rates fell over the past 2 months, buyers seemed to be returning to the market.  That coincided with a slight uptick in the number of homes for sale.  Total inventory, however, is still historically low & is keeping competition high.  It is also keeping home prices stubbornly hot.  High prices & low supply combined to make 2023 the worst for home sales since 1995.  Most predict 2024 will be better.  “The strong job market is good news for the spring buying season as higher household incomes are a necessary component, but it also means that mortgage rates are not likely to drop much further at this point,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association.  Mortgage applications to purchase a home had been rising steadily, but fell back in the last few weeks, as mortgage rates edged higher.  With the all-important spring housing market closing in, rates are more important than ever, given high & still-rising home prices.  “The future of rates in 2024 is all about ifs and thens,” said Graham.  “If we see more data like last Friday’s jobs report, rates will have a hard time getting back below 7%. But inflation is even more important than the labor market. If inflation comes in cooler than expected, it could balance the outlook.”

Mortgage rates jump back over 7% as stronger economic data rolls in

Interest rates running at their highest levels in about 23 years are not hurting the economy & could buy policymakers more time before deciding whether to cut, Minneapolis Federal Reserve Pres Neel Kashkari said.  In an essay, Kashkari said economic developments have shown that Fed policy is not as restrictive on growth as it appears on the surface.  That means the longer-run “neutral” rate, or the level that is neither restrictive nor stimulative, is probably higher than before the Covid-19 pandemic.  In essence, what would appear to be tight monetary policy judging by history over the past 15 years or so no longer looks that way, meaning nominal rates could hold higher for longer without harming the economy.  “This constellation of data suggests to me that the current stance of monetary policy … may not be as tight as we would have assumed given the low neutral rate environment that existed before the pandemic,” Kashkari wrote.  The implications are important as the Fed contemplates when to start, how much it should cut & how quickly should it do so to get back to a neutral setting.  Markets have been betting on an aggressive move lower, but recent statements from central bank officials indicate little need to hurry.  “It is possible, at least during the post-pandemic recovery period, that the policy stance that represents neutral has increased,” wrote Kashkari, a nonvoting member of the rate-setting Federal Open Market Committee this year.  “The implication of this is that, I believe, it gives the FOMC time to assess upcoming economic data before starting to lower the federal funds rate, with less risk that too-tight policy is going to derail the economic recovery.”  Kashkari pointed to a variety of such data to show that the Fed hikes have not thwarted growth, leading to his conclusion that the neutral rate is likely higher than the 0.5% or so that Fed officials generally estimate.  There is no official “neutral rate,” & officials often stress that it can only be estimated but never observed.  Some policymakers like to use the fed funds rate minus inflation as neutral.  Kashkari prefers the 10-year TIPS yield , which is now around 1.82%.  He notes that it has risen since over the past year, but only modestly.  At the same time, business investment & big-ticket purchases have risen while housing numbers at least have moderated.  “These data lead me to question how much downward pressure monetary policy is currently placing on demand,” Kashkari said.  He did note that the data is not “unambiguously positive” & he will be watching items such as loan & credit card delinquencies for evidence of economic stress.

Kashkari backs sentiment that the Fed can take its time cutting interest rates

Restaurants have proved to be resilient in the face of elevated costs, shallow labor pools, uneven customer traffic levels and crime, as sales are projected to exceed $1.1T in 2024.  It marks a new milestone for the industry & it is a far cry from the $678B sales reached in 2020, when indoor dining was essentially brought to a standstill.  It is even a boost from pre-pandemic times, when the industry notched $864B, according to the National Restaurant Association's 2024 State of the Restaurant Industry report.  On top of that, US restaurants, which employ one in 10 US workers, are also expected to add 200K positions to reach 15.7M jobs by year's end, according to the report.  Yet, operators are still less bullish on the year given that the problems in the industry are persisting.  Costs are still running high in many categories & crime prevention is eating into profits.  "Profit margins are especially thin in the restaurant, running three to five percent on average, and added security costs cut into margins significantly," CEO Michelle Korsmo said.  Korsmo noted that a restaurant operator reported spending approximately $80K per year just on security to keep employees & customers safe from brazen crime.  In many areas, operators have reported seeing fewer diners due to safety concerns, "often resulting in closure of once profitable restaurants," Korsmo added.  Just last month, Denny's closed a location in Oakland, California, after 54 years due to high crime in the city.  It came after In-N-Out announced it would be closing its Oakland location in Mar due to rampant violent crime & theft, marking the first time in the chain's history that it has been forced to close one of its restaurants.  Labor & food costs also "remain the most significant challenges," with nearly every restaurant operator saying these 2 issues are prevalent, according to Korsmo.  Meanwhile, operators are also battling rising credit card swipe fees, which are one of the highest operating expenses, having more than doubled over the past decade.  In 2022, they cost businesses more than $160B, she said.  Operators are facing pressure to offer a "well-presented value proposition" to reel in customers.  This includes loyalty programs or discounts for dining on off-peak days or hours.  They are appeasing the 7 in 10 adults who say they are often looking for a daily special or discount, whether they are dining in or taking out.

Restaurants sales expected to top $1T, but theft, high costs and cautious consumers pose challenges

Gold prices fell as the $ rose to the highest in nearly 3 months, continuing to move higher following Fri's unexpectedly robust Jan jobs report that dashed hopes for a quick cut to interest rates.  Gold for Apr closed down $10 to settle at $2042 per ounce.  The US on Fri reported it added 353K new jobs in Jan, up from 216K in Dec & well ahead of expectations for a rise of 185K.  The unemployment rate stayed steady at 3.7%.  The $ surged following the jobs report & continued to rise today on expectations interest rates will stay high for longer than hoped, with Fed chair Jerome Powell continuing to dash expectations for a Mar rate cuts on Sun.  The ICE dollar index was last seen up 0.48 to 104.4.  Gold fell victim to the hot US job report & Powell pushing back against a Mar rate cut, now down to 20% with the number of cuts this year below 5 from above 6 a week ago.  Treasury yields were also higher, raising the carrying cost of owning gold.  The US 2-year note was last seen paying 4.433%, up 6.7 basis points, while the yield on the 10-year note was up 13.5 basis points to 4.158%.

Gold Closes Lower as the Dollar and Yields Jump as Interest Rates Seen Staying High After January Jobs Report

West Texas Intermediate (WTI) crude oil closed higher after ending last week with a big drop, as a rising $ continued to climb following Fri's unexpectedly robust jobs report was offset by geopolitical worries following US air strikes on Iranian-backed militias in Syria, Iraq & Yemen.  WTI crude for Mar closed up 50¢ to settle at $72.78 per barrel, while Apr Brent crude, the global benchmark, was last seen up 80¢ to $78.13.  Price fell about 7% on Fri after the US added 353K new jobs in Jan, up from 216K in Dec & well ahead of expectations for a rise of 185K.  The unemployment rate stayed steady at 3.7%.  The $ surged following the jobs report & continued to rise today on expectations interest rates will stay high for longer than hoped, with Fed chair Jerome Powell continuing to dash expectations for a Mar rate cuts.  The idea of a near-to-date interest rate pivot started to erode with hawkish noises from the ECB, was given a further cautionary gouge by Jerome Powell's after-FED speech & all but undermined with the stellar non-farm payrolls from the US on Fri.  It is worth noting that in an interview aired last night, the Fed chair offered that this should be a time of prudence & the data should play out. The ICE dollar index was last seen up 0.5 points to 104.42.  Still, Mideast tensions continue to run hot, with no sign of a ceasefire agreement in the Israel-Hamas war, while the US promised further retaliation after launching trikes against Iran-backed militias in response to a drone attack on a base in Jordan that killed 3 of its soldiers.

WTI Closes Higher as a Rising Dollar is Offset by Mideast Tensions

Powell put a chill on prospects for an early interest rate cut.  But buyers returned in the PM for inspiration, waiting for new earnings reports while interest rates are back on the rise.

Dow Jones Industrials