Extra Helping of News Ahead of Thanksgiving

Stock are slightly lower after another record close yesterday, while Mortgage Bonds are both higher so far this morning.

Fed Minutes

1. All 19 members approved the 25bp cut
2. Inflation data generally remained consistent with inflation returning sustainably to 2%
3. Cited declines in job vacancies, the quits rate, and turnover as consistent with a gradual easing in labor demand
4. No sign of rapid deterioration in labor market conditions, with layoffs remaining low.
5. If data comes in as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time
6. “Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”
7. Could pause rate cuts if inflation remained elevated, or accelerate cuts if the labor market turned down or economic activity faltered

Personal Consumption Expenditures (PCE)

The Fed’s favorite measure of inflation, PCE, showed that headline inflation rose 0.2% in October (0.238% to be exact) and increased from 2.1% to 2.3% year over year, both as expected.

The core rate, which strips out food and energy costs and is the main focus of the Fed, rose 0.3% (0.273% exactly), with year over year Core inflation rising from 2.7% to 2.8%...both exactly as expected.

While inflation progress has stalled and even gone slightly in the wrong direction, we anticipated this, as the replacements from last year are extremely low and make it hard to make progress on inflation. When we get the January data in February, it will be much easier to make progress. The last three months annualized is 2.77% and the last six months is 2.32%.

Looking at the components, Shelter is the biggest contributor to inflation and is up 5% year over year, which is much hotter than real-time readings from CoreLogic at 2%. Because of the big weighting, Shelter accounts for 0.9% of the 2.8% year over year inflation reading.

If shelter were caught up real-time, core PCE would be 2.3%, not 2.8%.

Also within the report were figures on consumer incomes, spending, and their savings rate. Incomes rose by 0.6%, which was double market estimates. Consumer spending rose 0.4%, which was one tenth hotter than the market was anticipating. Because incomes rose at a faster rate than spending, the savings rate increased from 4.1% to 4.4%.

Pending Home Sales

Pending Home Sales, which measures signed contracts on existing homes, rose 2% in October, which was stronger than estimates looking for a 2% decline. The index is now at the highest level since March, with sales up 5.4% year over year. The NAR said that more inventory is helping to boost sales, as well as a record high Stock market, which is influencing high end home buyers.

Lock box openings were up 7% year over year in October.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 2,000 to 213,000. While this figure has been extremely low relatively speaking, Continuing Claims have been rising to levels we have not seen since 2021.

Continuing Claims measures Individuals continuing to receive benefits after their initial claim, and last week they rose 9,000 to 1.907M. This shows that while employers are holding onto their employees, it’s becoming more and more difficult to find a job once let go. And remember, for most people these benefits only last 26 weeks, so many are falling off benefits, yet this number continues to rise. This shows weakness and less hiring.

Q3 GDP (Second Look) & Durable Goods Orders

The second reading on Q3 GDP showed that the US economy grew by 2.8%, which was unchanged from the first look.  

Durable Goods Orders fell 0.2% in October, which was lower than estimates of 0.5%.

Transportation often has a big impact on Durable Goods Orders because there can be substantial aircraft orders. When stripping out transportation, orders rose 0.1%, which was one tenth lighter than estimates.

The most important reading is Core Durable Goods, with came in at -0.2%, which was three tenths below estimates looking for a 0.1% rise. Outside of AI, capital spending continues to flatline.

Mortgage Applications

The Mortgage Bankers Association (MBA) reported that mortgage rates dropped slightly to 6.86%, but still remained around 6 7/8% and were 3/4% lower than this time last year.

Purchase applications rose 12% last week and are up 52% year over year. Refinances fell 3% and are now up 119% from this time last year. The year over year numbers need to be taken with a large grain of salt, as they are being compared to Thanksgiving week last year, when there were very few transactions. Fade those numbers and wait till next week to get clearer figures on a year over year basis.

Technical Analysis

Mortgage Bonds are continuing to trade above the 200-day Moving Average for the third day, which is a good sign. If Bonds can remain above this level and catch a bid, there is a lot of room to the upside before reaching 101.22.

The 10-year continues to trend a bit lower, with room to go until reaching its 200-day Moving Average at 4.21%.