PrefBlog

So, the Fed cut by a quarter:

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.

The voting was interesting, with two hawks and one dove dissenting, which underscores the uncertainty that prevails globally. Of course, there’s there’s one guy who’s never uncertain:

“Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!,” Mr. Trump said in a tweet shortly after the Fed’s announcement, referring to Jerome H. Powell, the Fed Chair.

Equities fell initially, and then:

But stocks reversed their slide during Powell’s news conference following the policy decision, during which he said the Fed is closely monitoring economic data, trade and global growth risks, but did not see imminent recession, or think the central bank would cut rates to negative territory.
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U.S. Treasury yields dipped following Powell’s remarks.

Benchmark 10-year notes last rose 7/32 in price to yield 1.7909%, from 1.814% late on Tuesday. The 30-year bond last rose 23/32 in price to yield 2.2471%, from 2.28% late on Tuesday.

The dollar strengthened following the Fed’s rate cut. The dollar index rose 0.28%, with the euro down 0.36% to $1.1031.

And in the frozen north:

The Canadian dollar weakened to a two-week low against its U.S. counterpart on Wednesday as oil prices fell and after the U.S. Federal Reserve was less dovish than some investors had anticipated.
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Canadian government bond prices were higher across a flatter
yield curve. The two-year rose 2.5 Canadian cents to yield 1.598% and the 10-year was up 15 Canadian cents to yield 1.433%.

The 10-year yield touched its lowest intraday since Sept. 12 at 1.409%.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.48%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has plunged to 375bp from the 415bp reported September 11.

Nerves?

The U.S. Federal Reserve on Tuesday injected billions into the financial system in an effort to calm money markets that have been roiled since Monday, as lending dwindled partly due to huge payments for taxes and bond supply.

The chaos in money markets added to Fed policymakers’ list of concerns that is already heavy on risks from U.S.-China trade tensions, a weakening global economy and sluggish domestic inflation.
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At one point on Tuesday, overnight borrowing costs in the $2.2 trillion repurchase agreement market spiked to as high as 10%.

In the repo market, banks and Wall Street dealers use securities as collateral to obtain cash from money market funds and other cash investors.

Another alarming signal was a jump in the average federal funds rate, which the central bank aims to influence. It reached 2.25% on Monday, which matched the upper end of the Fed’s current target range and was a move not seen since the height of global credit crisis more than a decade ago.

Over the weekend, global markets received another lesson in why market timing doesn’t work:

Oil ended nearly 15 per cent higher on Monday, with Brent logging its biggest jump in over 30 years and a record trading volumes, after an attack on Saudi Arabian crude facilities cut the kingdom’s production in half and intensified concerns of retaliation in the Middle East.

Brent crude futures settled at $69.02 a barrel, rising $8.80, or 14.6 per cent, its largest one-day percentage gain since at least 1988.

U.S. West Texas Intermediate (WTI) futures ended at $62.90 a barrel, soaring $8.05, or 14.7 per cent – the biggest one-day percentage gain since December 2008.

Trades also ramped up, with Brent futures surpassing 2 million lots, an all-time daily volume record, Intercontinental Exchange spokeswoman Rebecca Mitchell said.
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Saudi Arabia is the world’s biggest oil exporter and, with its comparatively large spare capacity, has been the supplier of last resort for decades.

The attack on state-owned producer Saudi Aramco’s crude-processing facilities at Abqaiq and Khurais cut output by 5.7 million barrels per day and threw into question its ability to maintain oil exports.

And now it’s time to start preparing PrefLetter!

It appears that anybody who doesn’t like the idea of negative interest rates is an enemy of the people:

U.S. President Donald Trump on Wednesday called on the “boneheads” at the Federal Reserve to push interest rates down into negative territory, a move reluctantly used by other world central banks to battle weak economic growth that risks punishing savers and banks’ earnings in the process.

Trump, in a pair of Twitter posts, said negative rates would save the government money on its debt, which including Social Security accounts has reached a record $22 trillion on Trump’s watch.

“It is only the naïveté of (Fed Chairman) Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing,” added Trump, who has repeatedly noted that rates are negative in Germany, Europe’s trading powerhouse.

Pew Research has a nice page on the US federal debt:

Net interest payments on the debt are estimated to total $393.5 billion this fiscal year, or 8.7% of all federal outlays. (The government projects it will pay out a total of $593.1 billion in interest in fiscal 2019, which ends Sept. 30, but that includes interest credited to Social Security and other government trust funds.) By comparison, debt service was more than 15% of federal outlays in the mid-1990s. The share has fallen partly because lower rates have held down interest payments, but also because outlays have risen substantially, up about 29% over the past decade.

Click for Big

Rent control has come to California! I started reading the article prepared to hate the idea, but they’ve actually done a reasonable job:

California lawmakers approved a statewide rent cap on Wednesday covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide.

The bill limits annual rent increases to 5 percent after inflation and offers new barriers to eviction, providing a bit of housing security in a state with the nation’s highest housing prices and a swelling homeless population.
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In February, Oregon lawmakers became the first to pass statewide rent control, limiting increases to 7 percent annually plus inflation.
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Economists from both the left and the right have a well-established aversion to rent control, arguing that such policies ignore the message of rising prices, which is to build more housing. Studies in San Francisco and elsewhere show that price caps often prompt landlords to abandon the rental business by converting their units to owner-occupied homes. And since rent controls typically have no income threshold, they have been faulted for benefiting high-income tenants.
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But many of the same studies show that rent-control policies have been effective at shielding tenants from evictions and sudden rent increases, particularly the lower-income and older tenants who are at a high risk of becoming homeless.

Allowing increases in excess of inflation gives comfort to landlords that they will, eventually, be able to charge the tenant the market rate, while protecting the tenant from ludicrous increases. Avoiding the dislocation inherent in the face of extortionate increases and allowing tenants to plan is a public good that is worth money, even though it is assigned zero value in the disapproving studies.

PerpetualDiscounts now yield 5.63%, equivalent to 7.32% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.17%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remains at 415bp (where it was on September 4, close to the post-Credit Crunch record of 420bp set August 28. The latter value is second only to the 445bp recorded November 26, 2008, a day on which

The TXPR index was down 5.94% on the BCE news.