Because of the expected hawkish Fed tone and room for yields to move higher, we are advising you continue to have a locking stance.
The Fed is going to almost certainly cut rates 25bp at 2:00pm ET, but the real story will be Powell's press conference and the SEP (Summary of Economic Projections). We believe the Fed will signal less rate cuts next year via their Dots Plot Chart, which will probably add some pressure to Bonds, as it will show the Fed is more concerned will inflation and that the labor market is stronger than previously thought. Previously, the Fed forecasted 100bp of cuts on September 18, but that could be reduced to 75bp or even 50bp.
Stocks are slightly higher, and Mortgage Bonds are trading near unchanged levels so far this morning, ahead of the big Fed Decision, Statement, Press Conference, and projections. The Bond market has been pricing in a hawkish cut, meaning that the Fed will cut 25bp, but sound more hawkish and remove cuts planned for next year, as well as change their tone on inflation.
Fed Day
The Fed is going to almost certainly cut rates 25bp at 2:00pm ET, but the real story will be Powell's press conference and the SEP (Summary of Economic Projections). We believe the Fed will signal less rate cuts next year via their Dots Plot Chart, which will probably add some pressure to Bonds, as it will show the Fed is more concerned will inflation and that the labor market is stronger than previously thought. Previously, the Fed forecasted 100bp of cuts on September 18, but that could be reduced to 75bp or even 50bp.
The Fed can change their mind quickly - Whatever they show today in their projections, it is likely far off from what will actually happen next year. It would only take one really bad Jobs Report or Shelter inflation to catch up and inflation to move lower for them to change their tune quickly.
One wild card to watch out for that could be helpful - The Fed has been reducing their balance sheet, but they may announce today or sometime next year that they are going to stop the runoff. When they do, the Fed will keep their balance sheet "net neutral," which means that any assets rolling off their balance sheet will have to be reinvested back into Treasuries, which is a good thing for absorbing the supply of Treasuries. They may not mention today, but there is a possibility. We do believe that they will stop the runoff at some point next year.
NAHB Housing Market Index
The December NAHB Housing Market Index, which measures builder confidence, was unchanged at 46, which is still in contraction beneath 50, but five points better than where it was back in July.
Looking at the internals:
Current Sales: Unchanged at 48 (highest since May)
Future Expectations: rose 3 points to 66 (near three year high)
Buyer Traffic: Fell 1 point to 31
Current sales are almost at the 50 level, while Future Expectations continue to move higher, as builders are clearly feeling more optimistic about the future, and traffic remains muted.
NAHB Chairman Carl Harris said, “While builders are expressing concerns that high interest rates, elevated construction costs and a lack of buildable lots continue to act as headwinds, they are also anticipating future regulatory relief in the aftermath of the election. This is reflected in the fact that future sales expectations have increased to a nearly three-year high.”
NAHB Chief Economist Robert Dietz said, “Concerns over inflation risks in 2025 will keep long-term interest rates, like mortgage rates, near current levels with mortgage rates remaining above 6%.”
The latest HMI survey also revealed that 31% of builders cut home prices in December, unchanged from November. Meanwhile, the average price reduction was 5% in December, the same rate as in November. The use of sales incentives was 60% in December, also unchanged from November.
Housing Starts and Permits
Housing Starts, Permits, and Completions were softer in October, partially due to market conditions, but the impact of Storms in the south added to the weakness. The near 6-year low in Starts means there will be less new inventory in the future, which is a double-edged sword – While it will lead to less transactions, it will likely be supportive of home values.
Permits, which lead the way for Starts, rebounded for multi family, but were flat for single family. The overall number of permits on an annualized basis is 1.51M, but not all of those projects will be started and completed.
A better figure for the upcoming supply is Housing Starts, where ground has already been broken. Starts fell almost 2% last month and are down almost 15% year over year. Single family is down over 10%, while multi-family is down 28%.
The overall annualized pace for Housing Starts is 1.29M, and when subtracting out roughly 100k homes that are retired due to aging, you could expect about 1.2M homes to hit the market. At the same time, the annualized pace for household formations is currently at 1.9M…which means that supply will not keep up with demand and that’s supportive of home price appreciation going forward.
Mortgage Applications
The Mortgage Bankers Association (MBA) reported that mortgage rates move higher last week from 6.625% to 6.75% and are pretty close to where they were at this time last year.
Purchase applications rose 1% last week and are up 6% year over year. Refinances fell 3% last week and are up 41% year over year.
Technical Analysis
Mortgage Bonds continue to trade in a narrow range between support at 100.77 and overhead resistance at the 200-day Moving Average, while the 10-year is still trading in a wide range between support at 4.33% and overhead resistance at 4.50%. The charts will likely take a backseat to the Fed announcement this afternoon, which we think will be a negative for the Bond market.
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