One week ago, well before the WSJ's leaked flipflop on what the Fed will do, Barclays rates strategists Jonathan Millar and Ajay Rajadhyaksha were the first to correctly call a 75bps rate hike when 50bps was still the broad consensus. Well, moments after Powell proved them right, the Barclays duo came out with another report which maybe while not as remarkable is still quite noteworthy in its break from consensus. Indeed, with most banks now expecting the Fed's autopilot to kick in and for the Fed to keep hiking 75bps (even though Powell said not to expect 75bps moves to be common) with Goldman now calling for another 75bps in July, Barclays is once again taking the other side, and writes that "the Fed will go back to a 50bp hike in July, amid signs that consumption and the US housing market are slowing."
Here are some more excerpts from the note available to professional subs in the usual place:
Last Friday, right after the CPI report, we changed our call for the Fed’s June meeting, from a 50bp to a 75bp hike. The meeting was just days away and markets were priced for 50bp. But we felt the Fed needed to show urgency after the magnitude of the May inflation surprise and would make a statement move. One hurdle in moving so sharply, of course, was that markets would promptly price in 75bp in future meetings, pushing the Fed into a corner. But we believed that was not enough to stop the central bank from moving by 75bp in June
Things played out as we expected. An hour ago, the Fed raised the funds rate by 75bp for the first time in decades, and the press conference is currently in progress. But sure enough, markets now expect another 75bp in July, with a very high probability. But once again, we have a non- consensus call. We now expect the Fed to shift back to a 50bp hike at the July 27 meeting, bucking current market expectations, for a few reasons.
- First is the state of the US consumer. Like Atlas with the weight of the world on his shoulders, the consumer has been supporting the US economy all year. But households are finally reacting to high inflation and negative real wage growth. Our high-frequency credit card data show a deceleration in the pace of spending in the last 4-6 weeks, in both goods and services. And from both high- and low-end consumers. Today’s retail sales miss points in the same direction, as does last Friday’s University of Michigan consumer confidence numbers: the current conditions and expectations components were abysmal. Retailers crying themselves hoarse about excess inventories also suggests a pull-back in demand (in addition to poor inventory management) and the prospect of imminent goods deflation in some areas. We would be tempted to ignore each of these signals on its own. But together, they are worrisome. Q2 might be the quarter when the US consumer slows. At the very least, recent data should give the Fed food for thought
- Second is housing. While the pace of home price increases has not yet slowed, economic activity related to housing has – a lot. Existing home sales have fallen 13% from January to April, new home sales by almost 30%. Moreover, neither series reflects much of the jump in mortgage rates. Loans are usually locked two months before a transaction closes, which means the last 150-200bp rise in the mortgage rate has not hit home sales. The mortgage purchase index is down to levels last reached in 2016, but there is a long ways to go before home sales bottom later this year, as we expect. In the same vein, a peak in rental inflation might be around the corner. Rental series such as Zillow and REIS peaked in Q4 21; we estimate a two to three quarter lag between those series and rents in CPI. The relationship is neither perfect nor precise. But it clearly exists, and it suggests an easing of rental inflation pressures is coming. And, of course, housing matters in many ways to the US economy, beyond just inflation. The existing MBS universe is so deeply out of the money that an entire army of appraisers, loan originators, title company workers – hundreds of thousands involved in the machinery of refinancing mortgages – are vulnerable. Not to mention workers involved in building new homes and in the ancillary economic activity associated with housing (moving, new furniture, etc.), who should all see spill-overs as the housing slowdown continues.
Of course, the strategists counter, inflation is still very high and price pressures have been broadening in recent months - yes, the June CPI report could be an upside surprise, if the rise in energy prices has not fully filtered through. And there is the risk that the second quarter’s increase in energy prices sets the stage for a new round of wage increases later this year. Chairman Powell was careful not to rule anything out at today’s press conference. But he did say that 75bp moves were ‘unusual’.
Also, the Fed’s willingness to hike to 3.8%, 130bp over its own estimate of the long-term neutral rate (2.5%), should soothe fears about its commitment to targeting inflation, and thereby reduce the need to do another 75bp for credibility reasons. On the data itself, it is hard to see how much longer sectors such as airline fares can surprise to the upside, given the massive increases in the past two months.
Finally, financial markets have also tightened very considerably, which is bound to be another drag on activity in the coming quarters. Dollar strength is showing up in import prices, which should eventually feed through to broader inflation measures. Finally, there are almost six weeks to the next meeting, which means a chance for the Fed to absorb a greater amount of data.
The report's conclusion: "75bp is a strong move – a statement hike. The Fed made one. Given what we are seeing in the economy and in housing, we believe it will not need to make another. We think they it move to a 50bp hike in July.'