Stocks and Mortgage Bonds are both moving higher so far this morning. The 10-year is continuing to move lower and is testing support at the 50-day Moving Average.
Fed Meeting Breakdown
Yesterday, the Fed released their statement from their 2-day meeting, followed by a Jerome Powell press conference. Initially after the statement, the Bond market sold off. The Fed’s statement was more hawkish, as they upgraded their language on the labor market and showed a bit more concern over inflation. Here are the changes:
Labor Market
Inflation
While Bonds sold off after the statement, Powell walked back many of the comments in his press conference, which helped Bonds to recoup all of their losses.
He explained that the tweaks in the language of the statement on the labor market and inflation should not be interpreted as a signal. After that comment, the Bond market recovered.
On the labor market, Powell said that it’s solid because firing rates have remained low, but he acknowledged that hiring rates have declined sharply.
We have been explaining for a long time that the main reason inflation is elevated above the Fed’s target is the lagging shelter data. Yesterday, Powell acknowledged this and said that the shelter component has been steadily catching up and is the main reason for the gap between where inflation is today and their goal. This means he also sees inflation coming down further because of this, unless we see some other factors that cause inflation to rise.
Powell also said that the Fed Funds Rate is meaningfully above neutral. He also said that the Fed is meaningfully restrictive, meaning that the Fed’s policy should still slow down inflation and growth in the US and they have room to cut rates still before getting to neutral.
On QT (Quantitative Tightening) or the reduction of their balance sheet, Powell explained that bank reserves are still abundant, so they will continue reducing the balance sheet, but did not give a timetable on how long it will continue or when it would stop. When it does eventually stop, the Fed will have to reinvest in Treasuries, which will absorb some of the supply.
GDP
Q4 GDP (Gross Domestic Product), which measures US economic growth, rose 2.3% in Q4 2024, which was beneath estimates of 2.6%.
Most of the rise came from consumer consumption and government spending. Because this was a miss and lighter than market estimates, it helped Bonds to move higher and yields to move lower.
Initial Jobless Claims
Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, fell 16,000 to 207,000. This does encompass last week, which was a holiday week, and historically they undershoot the number of claims during those times.
Continuing Claims, or those who continue to receive benefits after their initial claim, fell 42,000 to 1.858M. The previous report, however, was revised higher to 1.9M and is the first time we have hit that level in 38 months. Clearly, as the Fed explained, while firings are muted, once you are laid off it’s harder to find a job because hirings have slowed.
Technical Analysis
Mortgage Bonds hit our target at the 200-day Moving Average this morning, but have since pulled back from it as it is holding and is a difficult ceiling.
The 10-year also hit our target, testing support at the 50-day Moving Average at 4.479%, but that level is also holding yields from continuing lower.
Tomorrow’s PCE report will be key. The market is expecting headline inflation to rise from 2.4% to 2.6% and for core inflation to remain at 2.8% year over year. If Powell did get an early look at the report, the statement from yesterday likely points to core inflation not making further progress, but remaining at 2.8%.
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