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Investors have been hit with an early surprise before the release of today's FOMC minutes, which were supposed to give some clues about a reduction of the central bank's $9T balance sheet following a quarter-point rate hike in March. The clues are no longer needed. Fed Vice Chair Lael Brainard pre-empted the minutes on Tuesday by saying a "rapid" reduction could happen as soon as May, calling the move "of paramount importance" to bring down inflationary forces, while the Fed is "prepared to take stronger action if indicators show such action is warranted."
Supply and demand: Treasury yields shot up on the news, climbing 14 basis points yesterday to settle at 2.55%. Things kept going overnight, with the yield breaching the 2.6% level after rising 10 bps to 2.65%. When the Fed (the biggest buyer of Treasuries) reduces its balance sheet, the market is flooded with supply, meaning prices go down and yields go up (the two have an inverse relationship). As in most markets, current yields factor in future conditions, and all of those are now pointing to a faster pace of quantitative tightening.
Besides pulling liquidity from the financial system, another catalyst weighing on the bond market was a fresh sanctions package announced by the EU that proposed a ban on coal imports from Russia. The elevated commodity prices that are likely to ensue will drive inflation even higher, weighing further on the Treasury market (which is strongly linked to inflation). There's also a 78% chance the Fed will raise its key rate by half a percentage point in May - a pace it hasn't used since 2000 - on top of the median estimate of seven rate increases this year.
Go deeper: The developments saw equities lose some of their steam, with stock valuations ballooning over the last decade alongside Fed balance sheets. There are further fears of slowing growth amid inverted yield curves, while Deutsche Bank has even become the first big bank to forecast a U.S. recession that begins in 2023. "We no longer see the Fed achieving a soft landing," wrote economists led by Matthew Luzzetti. "It is now clear that price stability... is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand." (6 comments)
The average rate on the 30-year fixed mortgage just crossed 5%, marking the first time it has passed the threshold since 2011 (save two days in 2018). It wasn't that long ago that consumers could have refinanced their mortgages below 3%, but the majority of those applications have since dried up. Homebuyers are also facing a pricey housing market, with a report from CoreLogic showing prices in February were up 20% from a year ago, marking the 12th consecutive month of annual increases.
Why are mortgage rates going up? A confluence of factors impacts the market, including a coming rate hike cycle from the Federal Reserve and economic uncertainty linked to the war in Ukraine. Rising inflation that erodes purchasing power, tighter lending regulations and the financial picture of consumers can also send rates higher. The borrowing benchmark does not only affect housing demand, but other significant implications ranging from consumer spending to labor mobility.
"If inflation doesn’t come under control and the Fed's action needs to be more aggressive, 6% is possible," said Skylar Olsen, principal economist at digital mortgage company Tomo, though she doesn't think the long-term outlook for rates will be that high.
Outlook: While it may not filter into mortgage applications for about a week - industry watchers will see that data next Wednesday - higher rates could push more people to the sidelines ahead of the peak spring season for the housing market. Yesterday's comments from Fed Vice Chair Lael Brainard are not helping the situation as the central bank looks to reduce its mortgage portfolio after propping up the market since the beginning of the pandemic. Paydowns may also slow due to higher rates, which could be troubling for the Fed if it wants to tighten more quickly. (100 comments)
Twitter (TWTR) is appointing Elon Musk to its board, bringing the social-media activist (and troll) inside the company fold. The announcement follows weeks of discussions between Musk, Twitter CEO Parag Agrawal and independent board chair Bret Taylor, as top brass learned that the Tesla (TSLA) CEO was accumulating a 9.2% stake in the platform. In fact, Musk began scooping up Twitter shares on Jan. 31, when the stock traded at $36.828, and those purchases continued through April 1, according to a new SEC filing. Twitter shares have soared about 30% to $51 over the last two sessions after his position was first disclosed.
Details: As long as Musk is on the board of directors (his current term is two years), his ownership stake will be capped at 14.9%. Musk currently controls only about 9% of the shareholder vote, meaning he'll need plenty of support for any future proposals. He also amended paperwork known as a 13D, which is generally associated with activist investors, but said he had "no present plans or intentions which would result in or relate" to a merger or sale, shake up the board or change the company's dividend or share buyback policy.
"He's both a passionate believer and intense critic of the service which is exactly what we need on @Twitter, and in the boardroom, to make us stronger in the long-term. Welcome Elon!" Agrawal announced by tweet. Twitter additionally confirmed that it has been working on a feature that would permit editing tweets (a contentious feature among its user base) and will test it in the coming months. According to the company, it predates the Monday evening poll from Musk, which saw 70% of respondents take issue with free speech practices on Twitter.
What to expect: Musk has described himself as a "free speech absolutist" in the past and has pushed Twitter to allow a wider range of opinions. "Looking forward to working with Parag & Twitter board to make significant improvements to Twitter in coming months!" he wrote in a follow-up tweet. With his new board seat, Musk will be able "to really kick up dirt," Bernstein analyst Mark Shmulik declared. "He moved from the back seat of the car to the front seat of the car. In fact, he’s probably the driver." (104 comments)
The contest to buy Spirit Airlines (SAVE) is heating up as a drive to consolidate takes off in the budget airline sector. JetBlue (JBLU) just offered $3.6B, or $33/per share, for the Florida-based carrier, which is roughly 40% more than the bid advanced by Frontier Airlines (ULCC) in February. Spirit's board said it will work with its financial and legal advisors to evaluate the latest deal and pursue what's in the best interest of Spirit and its holders (shares of the carrier rose 22% on Tuesday).
Quotes: "Customers shouldn’t have to choose between a low fare and a great experience, and JetBlue has shown it's possible to have both," JetBlue CEO Robin Hayes said in a statement. "An acquisition of Spirit by JetBlue, a high-fare carrier, would lead to more expensive travel for consumers," Frontier responded in an email.
Note that JetBlue has already looked to expand its national footprint to better compete against the big four airlines that dominate the skies: United (UAL), Delta (DAL), American (AAL) and Southwest (LUV). JetBlue also attempted to buy Virgin America in 2016, but lost a contest to Alaska Air Group (ALK).
Antitrust angle: The combination of the two carriers has already drawn some criticism on the antitrust front, with legislators, like Sen. Elizabeth Warren, calling on the Department of Justice to further investigate the deal to see if it harms competition. A combination of JetBlue and Spirit Airlines may also be potentially problematic as far as antitrust concerns, especially in the Florida market due to overlaps in cities such as Orlando and Fort Lauderdale. Lockheed Martin's (LMT) planned purchase of Aerojet (AJRD) was already blocked in January, while the DOJ is trying to disrupt American Airlines's domestic alliance with JetBlue. (33 comments)
In Asia, Japan -1.6%. Hong Kong -1.9%. China flat. India -0.9%.
In Europe, at midday, London -0.3%. Paris -1.4%. Frankfurt -1.4%.
Futures at 6:20, Dow -0.5%. S&P -0.7%. Nasdaq -1.1%. Crude +1.5% to $103.49. Gold +0.1% to $1929.30. Bitcoin -3.1% to $45,230.
Ten-year Treasury Yield +10 bps to 2.65%
Today's Economic Calendar
What else is happening...
Lithium names plunge as Manchin hits brakes on Biden EV push.
Fresh round of U.S., EU sanctions to target Russian investments.
White House expected to extend pause on student loan payments again.
Biden looks for ways to increase Canadian oil imports without pipeline