Bullard: US rates at zero not appropriate for the economy, time for a hike

Outlook:

We didn’t get a conventional Tuesday pullback yesterday but experience tells us it’s not far off. The problem with experience is that we have also seen the opposite—rallies persisting despite overbought/oversold conditions up the wazoo. It looks like the Greek drama is not going to deliver the catalyst, either. Traders are taking in stride that Greece has a “€1.7bn bill for wages and pensions at the end of the month and then a €450m loan payment to the International Monetary Fund on April 9. Greek government and eurozone officials believe Athens does not have funds to cover both.” Maybe traders believe the ECB will cough up the gains previously made on Greek paper, or something. The FT reports Greece is “raising public health coffers.”

A little congestion and confusion is normal under the circumstances. The news is riddled with records. The euro hit a 12-year low (1.0456). The Shanghai had a 10-day winning streak for the first time in 23 years. A majority of European notes up to 7 years are negative for the first time ever. And so on.

We think the Fed’s Bullard, non-voter though he may be, is having the most influence. His comments from yesterday are reverberating. He said rates at zero are simply not appropriate for the US economy and it’s time to get going with the First Rate Hike. More importantly, he decried the divergence between what the Fed thinks and what the market thinks. The Fed is actually hot to trot, in Bullard’s view, while the money and bond markets are overly sanguine about “lower for longer.” Bullard says “There’s going to be a reconciliation and that could be violent.”

So far the bond gang is paying no attention. The Market News fixed income reporter wrote “- The Treasury market was dead as a door nail all session until the first auction of the week neared and then prices got a modest lift. The slew of economic data for Tuesday was no more conclusive than the data that came out Monday so the Treasury market meandered around in a very tight range. For much of the morning the 10-year held between 1.918% and 1.896%.”

Well, maybe the bond guys were able to brush off data like yesterday’s CPI, but serious people see something there. Market News notes “Economists at Deutsche Bank said ‘If not for the sharp drop in energy, CPI would be rising at just about a 2% pace instead of the current unchanged reading’ year over year. CPI less energy has been in the 1.9%-2.0% range since last May. If this continues ‘headline inflation, which includes energy prices, will eventually gravitate back toward 2% in less than a year,’ Deutsche Bank said.” We say the curse is the word “year.” That’s just too far away.

The Fed can rejoice in recovery in the housing market. The relatively good rise in new mortgage applications reported this morning (4.9% in the latest week) is really quite amazing, considering that the high-population density states were all but stalled in bad weather. Zillow notes that the shortage of rental properties has raised rental rates to the point where younger people, who hitherto preferred to be free of conventional encumbrances, now see that buying is the financially correct thing to do. “About 5.2 million renters say they expect to purchase a house in 2015, up from 4.2 million a year earlier, a reflection of the improving economy, according to the Zillow Housing Confidence Index released earlier this month,” according to Bloomberg. Further, “Millennials made up 32 percent of the U.S. housing market in 2014, up from 28 percent two years earlier, and have pulled ahead of the older Generation X as the largest segment of buyers, according to the National Association of Realtors.” The sticking point is that incomes are not keeping up with rents. But the minute we see wages go up, we can expect demand for homes to go up, too. And prices. Yesterday the new home supply inventory fell 1.4% to 210,000 for a mere 4.7 months from 5.1 months—the lowest since last June. New home buyers don’t necessarily want new homes, but inventory looks weak. By the way, the median new home sales price was down 4.8% to $275,500 (but up 2.6% y/y).

We get durables today. It’s not likely to be a catalyst, either.

So, whence the FX market? The only clarity we see is a strong resistance line in the euro/CHF at 1.0526, although a breakout to the linear regression line at 1.0566 (H4 chart) is easily possible. There is some talk of new SNB intervention. We are not following it, having learned our lesson in January. Nobody can predict the SNB at this point. We continue to see the dollar coming back, at least a little, but can’t see the trigger. The only recourse for active traders is to frizzle around in the 15-minute timeframe or get out and stay out until congestion clears.