Stocks are higher and Mortgage Bonds are lower after the Fed cut rates 25bp yesterday, as expected.
Many are confused, wondering why rates are moving higher after the Fed cut. But the markets are forward looking, and rates have fallen 3/8% since August 22, when Powell telegraphed yesterday’s cut. There was definitely a bit of selling on the news, along with a low Initial Jobless Claims number this morning, causing Bonds to sell off.
Fed Meeting Breakdown
Yesterday, the Fed cut the Fed Funds Rate 25bp to a range of 4% to 4.25% The effective rate is 4.125%. Powell said that policy has been clearly restrictive, signaling that he believes the Fed has been more than just a little restrictive and that there is more room to cut.
The Fed said that economic activity has moderated in the first half of the year, and that their focus has been on the inflation side of their dual mandate, but now labor and unemployment are more in balance from a risk standpoint, with more downside uncertainty to labor.
The statement said that job gains have slowed and the unemployment rate edged up, but remains low. Powell said that job creations are running beneath the breakeven level, which is why the unemployment rate has been rising.
On inflation, Powell explained that it has moved up and remains somewhat elevated. He believes that 0.3% to 0.4% is due to the tariffs, but that it’s a one-time price increase and the effects will be short-lived. He also mentioned that services inflation has been cooling.
SEP (Summary of Economic Projections)
It’s likely that the Fed member who did not want to cut yesterday was either Schmid or Cook, and the person wanting 125bp of cuts is Miran.
The Fed Futures is forecasting an 88% chance of 25bp cut October 29 and a 78% chance of a 25bp cut on December 10, but of course those will change, depending on the labor and inflation data.
Initial Jobless Claims
The BLS reported that Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 33,000 to 231,000. After a big rise in the previous week, which was a holiday, claims are right back to where they have been. This caused Bonds to selloff this morning.
Continuing Claims or those who continue to receive benefits after their initial claim, fell 7,000 to 1.92M. While this level is still very elevated and signals less hiring, it’s off the recent highs.
Technical Analysis
Mortgage Bonds are breaking beneath support at 101.06 and have a lot of room to the downside before reaching the next floor at the 25-day Moving Average.
The 10-year has moved up to 4.126%, right on an important Fibonacci ceiling. If this level is broken, there is a lot of room to the upside in yields.
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