Stocks are mixed and Mortgage Bonds are higher after yesterday’s more dovish than expected Fed meeting.
Later this afternoon there will be a 30-year Bond Auction, which could impact the markets, depending on the level of demand. It will be interesting to see if there is strong demand after the more dovish Fed, which is helping yields.
Fed Breakdown
The Fed cut rates 25bp, as expected, but was more dovish than the markets had feared. Powell did set the bar higher for another rate cut, saying that the Fed is now in the upper bound of neutral, meaning there is not much room to cut further unless inflation falls or the labor market continues to weaken.
But he went out of his way to say that the BLS is overstating job growth by 60,000 jobs per month. He said that because of that, since April, he feels we have been losing 20,000 jobs per month. He may have some insight to next week’s BLS jobs data, so that could be friendly.
On inflation, Powell explained that services inflation is coming down, but is being offset by a rise in goods prices…but only in sectors that are impacted by tariffs. He thinks that without the tariffs, inflation is in the low 2’s and closer to their target, in line with what Truflation is saying. Powell believes the impact of the tariffs will peak in Q1 of next year.
Another big surprise was the Fed’s announcement that they will be buying $40 Billion per month in Treasury Bills, starting tomorrow. While this does not directly help longer-term rates, it could if Treasury Secretary Scott Bessent terms our debt shorter. That would mean the Treasury would issue less longer-term debt, which would help because there would be less that had to be absorbed by the Bond market, and issue more shorter-term debt…which would have a new source of demand.
There were three dissenters – Fed Governor Stephen Miran wanted to see a 50bp cut, while the Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid voted against a cut and wanted to pause. Goolsbee has really changed his tune and went from being one of the most dovish Fed members, not too long ago saying there was room to cut 7 times, to now being against the third cut this year. Schmid has been the Grinch that also dissented and was against the cut at the October 29 meeting. It’s no surprise that Stephen Miran, the super dove, voted once again for a 50bp cut.
The Fed is going to be getting more Dovish in 2026. The rotating Fed Presidents that will be leaving will be the aforementioned Chicago Fed President Austan Goolsbee and Kansas City Fed President Jeffrey Schmid, who are vocal hawks, as well as St. Louis Fed President Alberto Musalem and Boston Fed President Susan Collins…also a big hawk.
The three hawks and one somewhat centrist going out will be replaced with Cleveland Fed President Beth Hammack, Philly Fed President Anna Paulson, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari…all of whom are less hawkish than those going out.
Add to that the new Fed Chair starting next year and there will likely be a Fed that is more open to further cuts.
Looking at the Dots Plot Chart, the median amount of cuts for next year is one, but that can all change with the new composition of the Fed next year, especially because the dots were all over the place:
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose 44,000 to 236,000, the highest level since September. We thought we would see a bounce back after last week’s claims figure was low due to the Thanksgiving Day holiday influence.
Continuing Claims fell 99,000 to 1.84M, which was a surprise. But Continuing Claims looks back two weeks and is now being impacted by the Thanksgiving Day holiday week, much like Initial Claims were last week.
Additionally, most states allow for Continued Claims for 26 weeks, and if we look back 26 weeks ago to late May/early June, there was a spike in Initial Claims. They are falling off now and expiring. The combination of the BLS doing a bad job of seasonally adjusting around the holidays, along with the expirations, explains why Continuing Claims dropped so much, as we know there is not a lot of hiring happening.
Technical Analysis
Mortgage Bonds are in a much better position on the charts, breaking back above the 25 and 50-day Moving Averages, which will now act as support. The next ceiling is up at 101.32, roughly 18bp above present levels.
The 10-year has broken back beneath the 100-day Moving Average and important 4.126% Fibonacci Level. Yields tested the 25-day support level at 4.10%, which is holding for now.
We feel that with next week’s CPI and BLS Jobs Report, we could continue to see things move in the right direction.
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