Stocks and Mortgage Bonds are both lower so far this morning. Yesterday, the Fed concluded their 2-day meeting, and while they cut rates, it was viewed as a hawkish cut, pressuring the Bond market lower and rates higher.
It’s day 30 of the government shutdown, which is just a terrible thing. Food stamps will lapse starting November 1, which is a serious and scary situation. This, along with ATC delays/shutdowns, will hopefully pressure the government to reopen soon.
Fed Meeting Breakdown
Yesterday, the Fed cut the Fed Funds Rate 25bp to a range between 3.75% and 4%, which means the effective rate is 3.875%.
The vote was not unanimous – Miran dissented because he wanted a 50bp cut, while Schmid dissented because he was against the cut altogether.
The Fed also announced that they are stopping their balance sheet runoff, which should have been a good thing for Bonds. However, they said that they would reinvest the runoff from MBS into Treasury Bills, as opposed to overall Treasuries. This means they will not be reinvesting the MBS runoff in longer-dated Treasuries like the 10-year, which would have helped longer-term rates more directly, but rather Treasuries with maturities of 1 year or less.
The market has not yet figured out that Treasury Secretary Bessent could help to balance this by issuing more short-term debt and less long-term debt. The Treasury runoff will be reinvested back into like maturity assets to what is rolling off, which can be all along the yield curve. The Fed will stop the runoff and start reinvesting on December 1.
The Bond market was only slightly lower after the above was announced, but during the press conference, Powell sounded very hawkish, sending yields higher. When asked about a December 10 rate cut, he said that it was “not a foregone conclusion - far from it.” His tone and the way he answered, along with Schmid dissenting, put a hawkish tone on this rate cut.
We also believe Powell's comments mean that if the Fed does not receive more hard data before the next meeting, they will not cut rates again. That means that the shutdown needs to end soon, so that the different organizations have time to capture the data and construct their reports ahead of December 10. Once the shutdown ends, reports will not be released immediately, as the shutdown has impacted the period of time when they collect the data, which still has to be done.
Apartment List National Rent Report
Apartment List released their National Rent Report, showing that new rents decreased 0.8% in October, marking the third straight monthly decline. They said that it’s likely rents will continue to decline modestly to close out the year.
Year over year, new rents are down 0.9%. One of the reasons for the decline in rent prices is vacancy rates, which have risen to 7.2%, a new peak since they started tracking this metric in 2017.
Technical Analysis
Mortgage Bonds have moved much lower in their range, now testing support at the 25-day Moving Average. If this level is broken, the next stop is the 50-day, roughly 14bp lower.
The 10-year has broken above 4% and its 25-day Moving Average, now testing the next ceiling at the 50-day.
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