Stocks are higher with the Dow and S&P 500 at record highs. Mortgage Bonds are also higher and are erasing most of yesterday’s losses after the Fed decided to cut rates 50bp.
Fed Breakdown
The Fed cut rates 50bp yesterday to a target range of 4.75% to 5%, with the effective Fed Funds Rate at 4.875%. Deciding to go 50bp instead of 25bp shows that the Fed wanted to front load rate cuts and could signal they feel they were behind the curve and that they are somewhat concerned with the economy, specifically unemployment…even though they tried to stave that off by talking about how the economy was solid.
The vote was almost unanimous, with only Bowman dissenting – She is the first one to dissent in 19 years. The Statement showed that the Fed has gained further confidence on inflation and that job gains have slowed. They still feel the economy is growing at a solid pace and it appears that they believe they can stick the soft landing, meaning they can avoid recession.
Their Summary of Economic Projections shows that the Fed is forecasting 50bp of additional cuts this year and another 100bp of cuts next year. They don’t expect to see more progress on core PCE, as their year end target is 2.6%...which is the current level. They don’t feel they will get to their 2% goal until 2026…with inflation getting to 2.2% next year.
In Powell’s press conference he said that 50bp is not the cadence the market should get used to and it was a commitment to not fall behind. He also said that the markets should expect the Fed to continue to remove restriction, which means continue to cut rates. He doesn’t see anything that suggests the likelihood of a downturn is elevated.
There were knee jerk reactions to the decision, with Stocks and Bonds initially moving higher, but then ending the day lower. We are seeing Stocks rebound today, setting new all-time highs.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 12,000 to 219,000, which was lower than estimates.
Continuing Claims, which measures Individuals continuing to receive benefits after their initial claim, fell 14,000 to 1.829M, which is still near the highest level since November of 2021. This continues to support the slowdown in hiring as it’s harder to find a job once let go and people remain on benefits for longer.
As for the recent decline in continuing claims, it’s unclear if that’s because people are getting hired or their benefits are expiring, but with the slowdown in hiring, it’s likely expirations.
Existing Home Sales
Existing Home Sales, which measures closings on existing homes, fell 2.5% in August to an annualized pace of 3.86M units, which was weaker than estimates. The July reading was revised slightly higher, which means that sales are down 2.2% from the originally reported number…still a slight miss. Sales were down 4.2% year over year.
This report likely measured people shopping for homes in June and July, before rates made their latest leg lower. We expect to see activity pick up in the coming reports as rates have come down significantly.
Inventory increased 0.7% month over month to 1.35M units. Inventory is now up 22.7% year over year, but is still 27% less than pre-pandemic levels.
There is a 4.2-months’ supply of homes which is still tight because 4.6 months is considered normal.
Homes remained on the market for 26 days on average, up from 24 days in July. We also saw 24% of homes sold above the list price, down from 29% in the previous report, but showing that there are still bidding wars in about a quarter of home sales nationwide.
The median home price was $422,600, down 1% from last month, but up 4.2% from last year. First-time homebuyers accounted for 26% of sales, down from 29% in the previous report. Cash buyers accounted for 26% of sales, down from 27%, while Investors made up 19%, up from 13%.
CoreLogic Rental Index
CoreLogic reported that blended rents rose 2.8% year over year in July, which is down from 2.9% in the previous report. We continue to see market rents prices decline, yet they are not being reflected in the inflation reports we receive.
Rents are rising at 5.2% year over year in both the Consumer Price Index and Personal Consumption Expenditures reports. Based on the 2.4% overstatement because of the lag, and the respective shelter weightings in each report, CPI would be 2.2% instead of 3.2% and PCE would be 2.2% instead of 2.6%.
Technical Analysis
Mortgage Bonds have rebounded today and erased almost all of yesterday’s losses. Bonds are right up against resistance at 101.52 – If this level is broken, there is a lot of room for improvement. On the other hand, if Bonds are rejected, we must remain on guard as there is roughly 40bp of room to the downside before support.
The 10-year tested overhead resistance at the 25-day Moving Average at 3.77%, which held and pushed yields lower. Yields are now in a range between the aforementioned ceiling and support at 3.66%.
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