Important Fed Changes Explained

Stocks and Mortgage Bonds are both higher after a nice day yesterday, following the Fed’s two-day meeting.

The Fed left rates unchanged, as expected, but they made important changes to their balance sheet runoff as we had anticipated.

The Fed is now only going to allow $5B per month in Treasuries to runoff, instead of $25B previously. That means the Fed is going to be purchasing at least $20B per month in Treasuries, starting in April. The Bond market reacted favorably to this news, as the Fed will be absorbing some of the supply out there.

Here’s a good analogy – Imagine purchasing something on your credit card. You then return the item and receive that money back. But instead of keeping it and having your debt balance reduce, you go and purchase an item that costs the same amount. This keeps your debt balance the same, instead of allowing it to reduce, and you are still stimulating another business. This is essentially what the Fed is doing and it’s a good thing for Bonds.

The Fed’s statement showed that they are more concerned with Inflation than the labor market. They said, “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.” We would disagree – While the u-3 unemployment rate went up one tenth in the last Jobs Report, the u-6 all-in unemployment rate rose 0.5% to 8%...the highest level since October 2021. This is important because it’s not skewed by not counting people for various reasons like not looking for a job over the last four weeks.

The SEP (Summary of Economic Projections) was also released and shows where the 19 Fed members project things like the Unemployment Rate, GDP, Core PCE inflation, and the Fed Funds Rate will be this year.

Here is how the December 18 SEP compares to yesterday:

Unemployment Rate: 4.4% from 4.3%

GDP: 1.7% from 2.1%

Core PCE: 2.8% from 2.5%

Fed Funds Rate: Still 2 cuts

Clearly, the Fed is expecting the economy to slow, unemployment to rise a bit, and for inflation to be a bit hotter this year…likely due to some tariff impact.

On rate cuts – The Fed is still projecting two this year, but the Dots Plot shows that they did get a bit more hawkish. Previously, only one Fed member was in favor of zero cuts, but that has risen to four. Additionally, five members previously thought the Fed would cut three or more times, and now only two think they will cut three times, with nothing more than that.

The Fed Futures market is still pricing in three rate cuts this year. As we have said many times, if incoming data comes out that is weak, the Fed will change their tune very quickly. We still believe they will end up cutting four times this year.

Bottom line – This was a favorable Fed meeting for the Bond market, mainly because they are slowing their runoff in April and will be buying Treasuries and stimulative to the Bond market.

Existing Home Sales

Existing Home Sales, which measures closings on existing homes, rose 4.2% in February, which was much stronger than the 3% drop expected. The annualized pace of sales is now 4.26M, above the 3.95M anticipated.

This report likely measures people shopping for homes in December and January, when rates moved higher and were firmly in the 7’s, which makes today’s beat even more impressive.

Inventory rose 5.1% last month to 1.24M units. While inventory is up 17% from last year, it’s well below pre-pandemic norms and is still tight.

As we have recently gone over, supply is not keeping up with demand, which should be supportive of home prices into the future.

Putting together the pace of sales and inventory, there is a 3.5-months’ supply of homes, which was unchanged from January and less than a more balanced market at 4.6 months.

Homes remained on the market for 42 days on average, up from 41 days in January and 38 days last year. We also saw 21% of homes sold above the list price, a big jump from 15% in January and 20% last year.

The median home price was $398,400, which was up 1.3% in February and 3.8% year over year. Remember, this does not measure appreciation and is the middle priced home that sold, so the mix of sales has a big impact. We saw more homes in the west sell, where home prices are higher, which dragged the median price up.

Bottom line – This was a strong report and optimistic, especially as we head into the spring home buying season.

Technical Analysis

After trading sideways in a narrow range between  support at the 25-day Moving Average and overhead resistance at 101.39 for quite some time, they broke out to the upside yesterday after the Fed. Bonds are now in a new range, with the next ceiling of overhead resistance up at 101.71…roughly 12bp above present levels.

The 10-year Treasury Yield has made a nice move lower between yesterday and today, but is giving back some of it’s decline. Earlier today yields were firmly beneath their 200-day Moving Average, but they are now dead on it, testing that level. This is a very important floor, and if yields can close beneath it, there is a path to the recent lows we saw at 4.126%.