Stocks and Mortgage Bonds are both higher to start the day.

Later this afternoon at 1:00pm ET there will be a 10-year Treasury Note Auction, which could impact the markets, depending on the level of demand. We will see if there is an appetite for 10-year Treasuries with yields at 4.25% - If there is strong demand, it will likely push yields lower, but if it’s a weak auction, yields will likely rise.

Consumer Price Index

The November Consumer Price Index (CPI) report showed that overall inflation rose 0.3% for the month, which was one tenth above estimates of 0.2%. Year over year, inflation increased from 2.6% to 2.7%...but taking out it to the third decimal, it was 2.749%, which means it was very close to being rounded to 2.8%.

Food prices were one of the main reasons the headline came in a bit warmer than expected.

The Core rate, which strips out food and energy prices, increased by 0.3%, which was in line with expectations. Year over year, Core CPI remained unchanged at 3.3% as expected.

Used cars hurt the core reading, as they rose 2% in the month alone. Shelter was reported at .3%, which was a more modest reading than we have been seeing, but it would have been much lower if not for Lodging away from home.

Rent and Owners’ Equivalent Rent were both up only 0.2%, but Lodging away from home rose 3.2% in the month alone was the reason Core inflation did not come in one tenth beneath estimates.

It was very optimistic to see Rent and Owners’ Equivalent Rent come in at lower figures and if this trend continues, will make it much easier to make progress on inflation.

Lodging away from home can often be a wildcard and sometimes helps us, but in today’s report, accounted for 20% of the inflation we saw.

The Bond market appears to be reacting favorably to the decline in the Rents/OER mentioned above and what that could mean if this trend continues going forward.

If Shelter were caught up and it was not still lagging behind, Core CPI would be 2%, right in line with the Fed’s target.

ICE Home Price Index

ICE reported their Home Price Index yesterday, showing home values rose 0.2% in October and are now up 3% year over year, which is a slight increase from 2.9% in September. This was a bit of a stronger report than expected, as we often begin to see negative appreciation numbers towards the end of the year, followed by a lot of strength in the begging of the year through the spring home buying season and summer. This was also the first acceleration in year over year appreciation we have seen in this report in a few months.

Mortgage Applications

The Mortgage Bankers Association (MBA) reported that mortgage rates were essentially unchanged last week at 6.69% and are around 0.5% lower than this time last year.

Purchase applications fell 4% last week and are up 4% year over year. Refinances rose 27% and are up 42% year over year…but we have to take these numbers with a grain of salt, as they are being compared to a holiday week last week.

Technical Analysis

Mortgage Bonds are testing overhead resistance at the 101.39 Fibonacci level and 100-day Movng Average. The 10-year is trading just above its 200-day Moving Average, which we would love to get back underneath, but we would likely need to see a strong auction at 1:00pm ET for that to occur.

Stocks are lower and Mortgage Bonds are trading near unchanged levels so far this morning. Bonds were initially lower following a hotter wholesale inflation report, but were able to erase their losses because of higher number of Initial Jobless Claims.

Yesterday’s 10-year Treasury Note Auction was strong – Our own Bill Hagmann graded it a “B+”. Even after the strong demand at auction, Bonds sold off yesterday afternoon into the close.

Later this afternoon at 1:00pm ET there will be a 30-year Bond Auction, which could impact the markets, depending on the level of demand.

Producer Price Index

The Producer Price Index (PPI) report, which measures wholesale or producer inflation, rose 0.4% in November, which was hotter than estimates of 0.2%. Year over year, PPI rose from an upwardly revised 2.6% to 3%, which was much hotter than the 2.6% expected.

The previous year over year reading was revised higher from 2.4% to 2.6%, which did not help with today’s figures.

The Core rate, which strips out food and energy prices, rose 0.2% last month, which was in line with estimates. But year over year there was a big jump, once again due to the upward revisions to the previous report. The previous year over year report was revised higher from 3.1% to 3.4%, and it remained at 3.4% in today’s release. Because of the upward revision, the Core rate was higher than market estimates of 3.2%.

A big surprise in the report was a 31% rise in fruits and vegetables, which accounted for 0.1% of the rise on its own. There was also a 55% rise in chicken eggs, which also accounted for 0.1% alone. That means that half of the monthly overall inflation reading was due to a spike in eggs and fruits/vegetables. If not for these items, it would have been in line with estimates.

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), will be reported later this month on December 20. PCE shares some of the same components as the PPI report, so the hot monthly figures could filter through into PCE and potentially cause an upside surprise on the headline reading, but the core was much tamer.

Bottom line – the hotter wholesale inflation reading did pressure Bonds, but Initial Jobless Claims did help Bonds to pare their losses.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, rose 17,000 to 242,000, which was a lot more than estimates of 220,000 and the highest level in over two months.

We will have to see if this is an anomaly or a sign that things are starting to weaken more in the labor market and employers are letting go of workers – Next week will give us more confirmation.

Continuing Claims measures Individuals continuing to receive benefits after their initial claim, and last week they rose by 15,000 to 1.886M.

The continuing claims figure remains at the highest level since 2021, showing that it’s harder to find a job once let go.

Technical Analysis

Mortgage Bonds are testing support at the 50-day Moving Average, which is holding right now. Bonds room to the upside until reaching resistance at 101.39.

The 10-year is slightly higher at 4.28%, just beneath a dual ceiling of the 25-day Moving Average and 4.33% level, which should keep a lid on yields.

Stocks and Mortgage Bonds are higher to start a very important and likely volatile week.

Big Week Ahead

This week will be a very important one for the markets – The market is pricing in a 97% chance of another 25bp cut, but even with that, it could be a tough week for Bonds because of their projections.

The Fed will be releasing their summary of economic projections, which includes their Dots Plot Chart showing where they project where the Fed Funds Rate will be next year, as well as inflation, GDP, and the unemployment rate.

The previous Dots Plot Chart released on September 18 showed 1% of cuts in 2025, but it’s expected the Fed will likely take some of those away…but you can see how quickly they can change their mind. If we start to see some weaker labor market figures, the Fed will likely change their tune quickly.

One “x factor” that could help things would be any mention of stopping their balance sheet runoff in 2025, which means the Fed would have to start reinvesting in more Treasuries.

But most likely, we could see Bonds come under some pressure following the Fed.

Here is the schedule for the week ahead:

Tuesday: Retail Sales

Wednesday: Fed Meeting, Starts and Permits

Thursday: Final Q3 GDP, Existing Home Sales

Friday: Personal Consumption Expenditures (PCE)

PCE Preview

One of the big news items this week will be the Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE). The market is expecting both headline and core inflation to rise on a year-over-year basis.

Here is a breakdown of the expectations and forecasts based on the replacements:

Headline PCE

MoM Estimate: 0.27%

Replacement: -0.01%

Previous YoY: 2.3%

YoY Estimate: 2.6%

Core PCE

MoM Estimate: 0.26%

Replacement: 0.09%

Previous YoY: 2.8%

YoY Estimate: 3.0%

We believe we could see the figure come in one tenth lower than some of the market estimates out there and come in at 2.9%, due to more favorable shelter replacements from last year and the lower shelter reading in CPI. Even still, Headline PCE is expected to rise from 2.3% to 2.6%, and we believe Core will move up from 2.8% to 2.9%...which is the wrong direction and will likely not be good for the Bond market.

Technical Analysis

Mortgage Bonds are trading in a narrow range between support at 100.77 and overhead resistance at the 200-day Moving Average, both of which are holding for now.

The 10-year has broken out to the upside above its 25-day Moving Average and 4.33% Fibonacci level, but is moving a bit lower so far this morning, looking to retest the aforementioned levels.

Stocks are mixed and Mortgage Bonds are rebounding higher after a cooler than expected PCE inflation report.

Personal Consumption Expenditures (PCE)

The Fed’s favorite measure of inflation, PCE, showed that headline inflation rose 0.1% in November (0.128% to be exact) and increased from 2.3% to 2.4% year over year, both one tenth lighter than expected.

The core rate, which strips out food and energy costs and is the main focus of the Fed, rose 0.1% (0.115% exactly), with year over year Core inflation remaining at 2.8%...but the market was looking for a one tenth hotter monthly reading and for year over year core inflation to rise to 3%. Even we thought that with some help from shelter it would still rise to 2.9%, but it was unchanged and better than the market forecasts.

Looking at the components, Shelter is the biggest contributor to inflation and had a monthly reading of 0.226%, which is much lighter than the numbers we had been seeing previously – This is a great sign that shelter is starting to catch up. Year over year, shelter is still overstated and is up 4.78%, which is much hotter than real-time readings from CoreLogic at 1.7%.

If shelter were caught up real-time, core PCE would be 2.3%, not 2.8%.

Even though today’s monthly core reading was very low at 0.115% (which is only 1.4% annualized), year over year inflation remained at 2.8% because of the very low replacement of 0.09% from last November. But we will start to get some higher replacement figures when we get the January data in February, which will make it much easier to make big progress on inflation so long as the new monthly readings remain tame and shelter continues to catch up.

Beth Hammock, the Cleveland Fed President, was the lone dissenter at the Fed meeting, as she wanted to pause and not cut rates. She spoke this morning and gave her reasoning – She believes that the Fed is not far from a neutral stance and wanted to wait to cut more to make sure inflation is resuming its path to their 2% objective.

But we also heard from NY Fed President John Williams this morning, who is really the authority on the neutral rate. The NY Fed President always votes and is one of the most influential presidents because the NY Fed is where they do all of their purchases and desk operations.

Williams estimates that the Fed is still restrictive by 83bp, which means they could cut three more times at 25bp and still be restrictive. If we see the unemployment rate move higher next year or inflation make good progress, the Fed could change their mind quickly and end up cutting three or four times next year.

Also within the report were figures on consumer incomes, spending, and their savings rate. Incomes rose by 0.3%, while spending rose 0.4%, both one tenth lighter than estimates. Because consumders spent more than they earned, the savings rate fell from 4.5% last month to 4.4%. For perspective, this number was 4.6% last year and is now the lowest level since 2008 when removing covid. Additionally, November is normally a stronger month for spending, so this report may be showing some consumer weakness.

Next Week

Next week is Christmas – The market will be closing early on Christmas Eve and closed all day on Christmas. We will not have a morning update on either day, but will resume on the 26th. We hope you have a wonderful holiday.

Technical Analysis

Mortgage Bonds are trying to rebound after an ugly downtrend – If they can hold onto today’s gains, the three day candle pattern is a morning star, which would portend follow through to the upside…and there is room.

The 10-year tested overhead resistance yesterday at 4.588%, which held. Yields are now moving lower and testing 4.50%.

Stocks are slightly higher, and Mortgage Bonds are trading near unchanged levels so far this morning, ahead of the big Fed Decision, Statement, Press Conference, and projections. The Bond market has been pricing in a hawkish cut, meaning that the Fed will cut 25bp, but sound more hawkish and remove cuts planned for next year, as well as change their tone on inflation.

Fed Day

The Fed is going to almost certainly cut rates 25bp at 2:00pm ET, but the real story will be Powell's press conference and the SEP (Summary of Economic Projections). We believe the Fed will signal less rate cuts next year via their Dots Plot Chart, which will probably add some pressure to Bonds, as it will show the Fed is more concerned will inflation and that the labor market is stronger than previously thought. Previously, the Fed forecasted 100bp of cuts on September 18, but that could be reduced to 75bp or even 50bp. 

The Fed can change their mind quickly - Whatever they show today in their projections, it is likely far off from what will actually happen next year. It would only take one really bad Jobs Report or Shelter inflation to catch up and inflation to move lower for them to change their tune quickly.

One wild card to watch out for that could be helpful - The Fed has been reducing their balance sheet, but they may announce today or sometime next year that they are going to stop the runoff. When they do, the Fed will keep their balance sheet "net neutral," which means that any assets rolling off their balance sheet will have to be reinvested back into Treasuries, which is a good thing for absorbing the supply of Treasuries. They may not mention today, but there is a possibility. We do believe that they will stop the runoff at some point next year.

NAHB Housing Market Index

The December NAHB Housing Market Index, which measures builder confidence, was unchanged at 46, which is still in contraction beneath 50, but five points better than where it was back in July.

Looking at the internals:

Current Sales: Unchanged at 48 (highest since May)

Future Expectations: rose 3 points to 66 (near three year high)

Buyer Traffic: Fell 1 point to 31

Current sales are almost at the 50 level, while Future Expectations continue to move higher, as builders are clearly feeling more optimistic about the future, and traffic remains muted.

NAHB Chairman Carl Harris said, “While builders are expressing concerns that high interest rates, elevated construction costs and a lack of buildable lots continue to act as headwinds, they are also anticipating future regulatory relief in the aftermath of the election. This is reflected in the fact that future sales expectations have increased to a nearly three-year high.”

NAHB Chief Economist Robert Dietz said, “Concerns over inflation risks in 2025 will keep long-term interest rates, like mortgage rates, near current levels with mortgage rates remaining above 6%.”

The latest HMI survey also revealed that 31% of builders cut home prices in December, unchanged from November. Meanwhile, the average price reduction was 5% in December, the same rate as in November. The use of sales incentives was 60% in December, also unchanged from November.

Housing Starts and Permits

Housing Starts, Permits, and Completions were softer in October, partially due to market conditions, but the impact of Storms in the south added to the weakness. The near 6-year low in Starts means there will be less new inventory in the future, which is a double-edged sword – While it will lead to less transactions, it will likely be supportive of home values.

Permits, which lead the way for Starts, rebounded for multi family, but were flat for single family. The overall number of permits on an annualized basis is 1.51M, but not all of those projects will be started and completed.

A better figure for the upcoming supply is Housing Starts, where ground has already been broken. Starts fell almost 2% last month and are down almost 15% year over year. Single family is down over 10%, while multi-family is down 28%.

The overall annualized pace for Housing Starts is 1.29M, and when subtracting out roughly 100k homes that are retired due to aging, you could expect about 1.2M homes to hit the market. At the same time, the annualized pace for household formations is currently at 1.9M…which means that supply will not keep up with demand and that’s supportive of home price appreciation going forward.

Mortgage Applications

The Mortgage Bankers Association (MBA) reported that mortgage rates move higher last week from 6.625% to 6.75% and are pretty close to where they were at this time last year.

Purchase applications rose 1% last week and are up 6% year over year. Refinances fell 3% last week and are up 41% year over year.

Technical Analysis

Mortgage Bonds continue to trade in a narrow range between support at 100.77 and overhead resistance at the 200-day Moving Average, while the 10-year is still trading in a wide range between support at 4.33% and overhead resistance at 4.50%. The charts will likely take a backseat to the Fed announcement this afternoon, which we think will be a negative for the Bond market.

We will be hosting a webinar with Charlie Oppler, the former President of the National Association of Realtors, as well as Tim Braheem on December 20 at 1:00pm ET.  They will bring you latest on the NAR lawsuits and some important strategic planning for 2024 and ways to gain market share.  Register here:

https://highway-ai.zoom.us/webinar/register/7716999074391/WN_FSujkwhKSUCoeaq82uBRbA#/registration

Stocks and Mortgage Bonds have both rallied sharply in response to yesterday’s dovish Fed Statement and press conference from Jerome Powell, with 10-year yields now under 4%!

Fed Meeting Breakdown

The Fed pivoted at yesterday’s meeting, completely changing their tone and signaling rate cuts next year.  The Fed sounded much more dovish, saying that meaningful progress on inflation has been made and downgrading their view of the economy.  Powell outright said that the Fed will not be waiting for inflation to reach their target before cutting and would do so well in advance of it to account for the lags.  When asked what inflation would have to be for the Fed to cut, he did not commit, but it seems to us if we see it get under 3% that the Fed would give the green light to cut.  The Fed is finally starting to look a bit into the future, which is a good thing.  Unlike previous talks, Powell did not try to downplay the markets expectations of cuts next year.

When asked about the balance sheet, he said that the Fed is not thinking about stopping QT (balance sheet reduction) right now, but left the door open if things slow.  He explained that if it’s just to normalize policy, the Fed could wait.  But if we see a few bad jobs numbers, the economy slows, etc, they would like begin tapering or slowing the reduction. 

The Fed’s Dots plot chart, which shows anonymously where the 19 Fed members believe the Fed Funds Rate will be over the next few years, was telling.  There were a few outliers, with two members thinking that there would be zero cuts next year, while one member is pricing in 150bp of cuts.  The vast majority believes the Fed will cut by 50 to 100bp, with the median Fed Funds rate at 4.6%.

One thing that could cause the Fed to be more aggressive is the unemployment rate.  Most Fed members don’t see the unemployment rate getting higher than 4.1%, so that will be a key level to watch.  If it gets higher then many members will likely be surprised and the Fed could do more aggressive cutting.

Fed Futures Post Fed Meeting

The Fed Futures or the markets’ odds of rate cuts next year moved sharply higher and were pulled forward.  The market thinks there is almost a 20% chance of a rate cut at the January 31 meeting, followed by an 84% chance at the March 20 meeting. 

The market has a 100% chance of a cut priced in by May 1, with an 80% chance of 50bp of cuts.  In June the odds are at 81% for 75bp of cuts!

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 19,000 to 202,000.  This figure continues to remain somewhat muted, showing that employers are trying to hold onto their workers.

Continuing Claims, or those that continue to receive benefits after their initial claim, rose 20,000 to 1.876M, which is the second highest reading since November 2021.  This figure has been rising sharply and points to a weakening labor market where it’s much harder to find a job once you are laid off as employers are hiring less.

Retail Sales

Retail Sales in November rose 0.3%, which was stronger than the -0.1% expected.  Core Retail Sales, which gets plugged into GDP, beat estimates by two tenths, but were offset two tenths downward revision to October and one tenth downward revision to September.  As a result, there should not be much of an impact on GDP estimates.

Technical Analysis

Mortgage Bonds continue to trend higher, now breaking above resistance at 101.392.  The next stop is 101.65, which is a level that is holding for now.  The 10-year is down to 3.95%, sitting directly on a floor of support.  It was significant to see yields get under their 200-day Moving Average this morning and if they can break under 3.95%, there is a lot of room to the downside until reaching 3.76%.

Stocks are higher and Mortgage Bonds are slightly lower to start an important and potentially market moving week.  All eyes will be on the Consumer Price Index inflation report tomorrow morning and Fed Meeting on Wednesday.

Week Ahead

Monday: 10-year Note Auction

Tuesday: Consumer Price Index, 30-year Bond Auction

Wednesday: Producer Price Index, Fed Meeting

Thursday: Retail Sales

Consumer Price Index Preview

The highly anticipated Consumer Price Index report will be released tomorrow morning at 8:30am ET.  Market estimates are looking for the headline reading to be flat in November and to drop from 3.2% to between 3.1% to 3% on year over year basis.

The market believes the core reading, which strips out food and energy prices, will rise 0.3% in November and go from 4% to between 4% to 4.1%. 

Essentially, the market is expecting the headline to make some progress, but for the core to be flat to slightly higher.  Part of the reason for the lack of progress is due to weak comparisons or replacement figures in the year over year calculations from last year. 

We believe the headline reading is likely to be flat and we agree with market consensus.  We think the core reading could come out one tenth lower than estimates, as the comparisons from shelter last year are higher and used car prices continued to come down.  Additionally, the volatile lodging away from home component, which is comprised of hotel/motel prices and things like AirBNB’s can be the X factor.  We correctly forecast this last month and we don’t believe it will negatively impact in November.  Our work shows that hotel prices for most major cities besides Miami declined between Oct and November.

Technical Analysis

Stocks are mixed and Mortgage Bonds are trading near unchanged levels so far this morning.

Case Shiller Home Price Index

The Case Shiller Home Price Index, which is the “gold standard” for appreciation, showed that home prices rose 0.2% in December.  Home prices have been on the rise since January and are now up 5.6% from last year.  Case Shiller has continued to set new all-time highs in home prices as of July.  Since 2019, Case Shiller is reporting that home values have risen 46%!

FHFA House Price Index

The FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts.  Different than Case Shiller, it does not include cash buyers or jumbo loans.  The FHFA reported that prices rose 0.1% in December and are up 6.6% year over year.  FHFA has continued to set new record highs in home prices every month since February of this year.

With the December numbers now in for all of our appreciation reports that we track, here is how 2023 finished up:

Case Shiller: 5.6%

FHFA: 6.6%

CoreLogic: 5.5%

Black Knight: 5.6%

Durable Goods Orders

Durable Goods Orders in January were reported at -6.1%, which was even less than the estimates looking for -4.5%.  Adding to the weakness was a revision lower to December from 0% to -0.3%.  It appears we had a strong November head fake, followed by two negative months.

Even when stripping out transportation, which can be heavily impacted by aircraft orders, sales fell 0.3%.

Core Durable Goods rose 0.1%, which was as expected, but the previous month was revised lower by seven tenths from 0.1% to -0.6%.

Bottom line – After a weak Retail Sales number in January, we got a weak Durable Goods figure this morning, signaling a potential slowdown.

Technical Analysis

Mortgage Bonds continue to trade in a narrow range between important support at the 200-day Moving Average and overhead resistance at 100.428...but Bonds are testing that support level and trying to remain above it.  If this level fails to hold, there is nearby support at 100.068.  The 10-year is trading in a range between 4.25% and the 100-day Moving Average, which has kept a lid on yields and has prevented them from moving higher. 

Yesterday, a weak 2-year and 5-year Auction pressured the Bond market. 

We will see a 7-year Auction at 1:00pm ET, which is something to keep an eye on, as it’s additional supply that has to be absorbed by the Bond market. 

Stocks are lower and Mortgage Bonds are higher to start the day.

Q4 GDP (Second Reading)

The second reading of Q4 GDP showed that the US grew at a 3.2% annualized pace, which is a decline from the first reading of 3.3% and a lower rate of growth than the 4.9% seen in Q3.  The slightly lower second reading helped Bonds move a bit higher.

PCE Expectations

The big news tomorrow will be the Fed’s favorite measure of inflation, Personal Consumption Expenditures, for the month of January.  The market is expecting headline inflation to rise 0.3% and for the year over year reading to decline from 2.6% to somewhere between 2.4% to 2.3%.

The Core rate is expected to rise between 0.3% to 0.4% and for the year over year reading to decline from 2.9% to somewhere between 2.8% to 2.7%.

Even if we don’t get as favorable of a PCE reading as the market is hoping for, we already saw Bond price sell off in response to the CPI and PPI reports, so much of the downward move could be priced in.  Additionally, if we get a surprise lower figure, we could see outsized returns.

Atlanta Fed Wage Tracker

Wages in January moderated from 5.4% to 4.7%, which is a significant deceleration…And this figure was +6.2% a year ago.  And wage growth would have been even slower if not for the government wage increases, which rose 6.7% year over year, an acceleration from 5.8% a year ago. 

Consumer Confidence

The Conference Board released their Consumer Confidence for February, showing that overall confidence fell from 111 to 107.  Both the present situation and expectations for the future fell.  Of importance was the job related questions, which showed that those reporting jobs harder to get rose from 11% to 13.5%.

This coincides with Continuing claims, which have been elevated, showing it’s harder to find a job once laid off.  We also just heard that Macy is closing 30% or 150 of their stores. 

Fed Comments

Fed Governor Bowman spoke yesterday and acknowledged the PCE inflation is below 3%, but mentioned that the recent CPI and PPI inflation readings were hotter than anticipated.  He believes the Fed policy is appropriately restrictive and is not ready to cut yet.

The new KC Fed President Jeff Schmid, who will vote next year, said he is no rush to cut rates and is not a big fan of slowing the reduction of the balance sheet. 

MBA Mortgage Applications

The MBA released their Mortgage Application data for last week, showing that purchases fell 5% last week and are down 12% year over year.  Refinances fell 7% last week and are down 1% from last year.  Refinances made up 31% of all transactions, which is nearly a third.  There are still cash out refinances being done, but now even some rate and term refinances and removal of MI.  Make sure to tap your database.

Interest rates rose slightly to just over 7% and are roughly 0.3% higher than this time last year. 

Technical Analysis

Mortgage Bonds continue to trade in a narrow range between important support at the 200-day Moving Average, which held yesterday and this morning, and overhead resistance at 100.428.  The 10-year is trading in a range between 4.25% and the 100-day Moving Average, which has kept a lid on yields and has prevented them from moving higher. 

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Stocks are lower and Mortgage Bonds are higher to start the day.

Leading Economic Index

The Conference Board released their Leading Economic Index, which is forward looking index that takes a broad look at the economy.  In January, LEI fell 0.4%, which is the 22^nd consecutive month of declines.  The Conference Board softened their tone on recession expectations, saying “the leading index currently does not signal recession ahead. While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to near zero percent over Q2 and Q3.”  Even though recession is not forecasted in 2024, a recession-like slowdown would lower inflation and, in turn, lower mortgage rates.

MBA Mortgage Applications

The MBA released their Mortgage Application data for last week, showing that purchases fell 10% last week and are down 13% year over year.  Refinances fell 11% last week and are flat from last year.  Interest rates rose back above 7% to 7.06% from 6.9% and are roughly 0.4% higher than this time last year.

Leading Economic Index The Conference Board released their Leading Economic Index, which is a forward looking index that takes a broad look at the economy. In January, LEI fell 0.4%, which is the 22nd consecutive month of declines. The Conference Board softened their tone on recession expectations, saying “the leading index currently does not signal recession ahead. While no longer forecasting a recession in 2024, we do expect real GDP growth to slow to near zero percent over Q2 and Q3.” Even though recession is not forecasted in 2024, a recession-like slowdown would lower inflation and, in turn, lower mortgage rates.

Potential Market-Moving News

Later this afternoon at 1:00pm ET and 2:00pm ET, there will be a 20-year bond auction and the release of the Fed minutes from the January 31 meeting, respectively.  The minutes are old news from three weeks ago and will likely be overshadowed by the auction.  

Technical Analysis

Mortgage Bonds are continuing to trade in a tight range with support at their 200-day Moving Average and resistance at 100.428, which is an important Fibonacci level.  At 1:00pm ET we'll need to be on guard for the 20-Year Bond Auction, which may decide the direction MBS break out.

The 10-year is trading just above a floor of support at 4.25%, with resistance overhead at 4.34%, which is the 100-day Moving Average. 

Stocks are lower and Mortgage Bonds are higher to start the day.

Q4 GDP (Second Reading)

The second reading of Q4 GDP showed that the US grew at a 3.2% annualized pace, which is a decline from the first reading of 3.3% and a lower rate of growth than the 4.9% seen in Q3.  The slightly lower second reading helped Bonds move a bit higher.

PCE Expectations

The big news tomorrow will be the Fed’s favorite measure of inflation, Personal Consumption Expenditures, for the month of January.  The market is expecting headline inflation to rise 0.3% and for the year over year reading to decline from 2.6% to somewhere between 2.4% to 2.3%.

The Core rate is expected to rise between 0.3% to 0.4% and for the year over year reading to decline from 2.9% to somewhere between 2.8% to 2.7%.

Even if we don’t get as favorable of a PCE reading as the market is hoping for, we already saw Bond price sell off in response to the CPI and PPI reports, so much of the downward move could be priced in.  Additionally, if we get a surprise lower figure, we could see outsized returns.

Atlanta Fed Wage Tracker

Wages in January moderated from 5.4% to 4.7%, which is a significant deceleration…And this figure was +6.2% a year ago.  And wage growth would have been even slower if not for the government wage increases, which rose 6.7% year over year, an acceleration from 5.8% a year ago. 

Consumer Confidence

The Conference Board released their Consumer Confidence for February, showing that overall confidence fell from 111 to 107.  Both the present situation and expectations for the future fell.  Of importance was the job related questions, which showed that those reporting jobs harder to get rose from 11% to 13.5%.

This coincides with Continuing claims, which have been elevated, showing it’s harder to find a job once laid off.  We also just heard that Macy is closing 30% or 150 of their stores. 

Fed Comments

Fed Governor Bowman spoke yesterday and acknowledged the PCE inflation is below 3%, but mentioned that the recent CPI and PPI inflation readings were hotter than anticipated.  He believes the Fed policy is appropriately restrictive and is not ready to cut yet.

The new KC Fed President Jeff Schmid, who will vote next year, said he is no rush to cut rates and is not a big fan of slowing the reduction of the balance sheet. 

MBA Mortgage Applications

The MBA released their Mortgage Application data for last week, showing that purchases fell 5% last week and are down 12% year over year.  Refinances fell 7% last week and are down 1% from last year.  Refinances made up 31% of all transactions, which is nearly a third.  There are still cash out refinances being done, but now even some rate and term refinances and removal of MI.  Make sure to tap your database.

Interest rates rose slightly to just over 7% and are roughly 0.3% higher than this time last year. 

Technical Analysis

Mortgage Bonds continue to trade in a narrow range between important support at the 200-day Moving Average, which held yesterday and this morning, and overhead resistance at 100.428.  The 10-year is trading in a range between 4.25% and the 100-day Moving Average, which has kept a lid on yields and has prevented them from moving higher. 

Take a minute to fill out our March Housing Survey and share it with your Realtors for their insights.  We will provide you with a beautiful touch point in the coming week that you can share.  Take the survey HERE.

We will be hosting a webinar on March 6 at 1:00pm ET with Jeffery Love to learn how to protect your assets through estate planning.  Make sure to join us by registering HERE.  

Stocks and Mortgage Bonds are both starting the week lower.  It’s an important news week, highlighted by Jerome Powell speaking to congress and the Jobs data for February.

Early estimates are looking for 150,000 jobs created in the ADP on Wednesday and 200,000 in the BLS report on Friday.

OPEC+ is extending oil production cuts through Q2.  This could push oil prices higher, which have been on the rise and now trading around $80/barrel.  This could be another headwind for overall inflation and is something to keep an eye one.

Reverse Repo Facility Depletion

The Fed’s Reverse Repo Facility has been drained over the past year from a level of $2.4T not too long ago, now down to $441B.  Over just the last two days it has been depleted by $127B.

This may be due to some of the auctions last week and banks wanting to take advantage of the higher yields and lock those in, especially as it’s expected that the Fed will eventually begin cutting rates.  Another drain in liquidity will be the ending of the Fed’s Bank Term Funding program, which ends next week.

The Fed has been conducting Quantitative tightening or reducing their balance sheet by roughly $90-95B per month.  Thus far this has not been a problem because banks have been able to get liquidity from the Reverse Repo Facility and Bank Term Funding program, but once it’s drained/ended, we could start to see issues and that may force the Fed’s hand to reduce Quantitative Tightening sooner rather than later. 

We know their balance sheet is going to be a major topic of discussion at the Fed’s March 20 meeting because they told us it would be at their last meeting and the most recent Fed Minutes.  If the Fed were to begin tapering their balance sheet reduction, it would mean that they would start to purchase MBS and Treasuries with some of the funds they receive from assets falling off their balance sheet and would likely be a big help to MBS and rates.

News This Week

Wednesday: ADP Employment Report, JOLTS, Mortgage Apps, Powell Commentary

Thursday: Initial Jobless Claims

Friday: BLS Jobs Report

Technical Analysis

Mortgage Bonds are trading in a range between support at the 100.428 Fibonacci ceiling and overhead resistance at the 25-day Moving Average. 

The 10-year yield made a nice move lower of the past week after the 100-day Moving Average held and kept a lid on yields.  Yields are now testing the 25-day Moving Average as support, along with the 200-day Moving Average.  All eyes will be on Powell’s testimony and the Jobs data, which kicks off on Wednesday.  

Take a minute to fill out our March Housing Survey and share it with your Realtors for their insights.  We will provide you with a beautiful touch point in the coming week that you can share.  Take the survey HERE.

We will be hosting a webinar tomorrow at 1:00pm ET with Jeffery Love to learn how to protect your assets through estate planning.  Make sure to join us by registering HERE.  

Stocks are lower and Mortgage Bonds are higher to start the day.

Raphael Bostic Comments

Atlanta Fed President and voting member, Raphael Bostic, said he is in no rush to begin cutting rates and thinks it would be appropriate to cut 50bp in the second half of the year…but not consecutively.

He is also not in a rush to taper Quantitative Tightening or the reduction of their balance sheet.  Although we have largely not felt the impact of QT because the Reserve Repo facility has been getting drained and offsetting the effects…but that is now down to very low levels and if the Fed doesn’t adjust QT soon, we could start to see some negative impacts at banks and in the economy.  This may move up their time-table – we know it will be a main topic of discussion at the March 20 meeting.

On rate cuts – It appears that it is going to take a rise in the unemployment rate to get the Fed to move quicker/more aggressively, which is why Friday’s BLS Jobs report has a ton of importance. 

CoreLogic Home Price Insights

CoreLogic reported that home prices fell 0.1% in January and are now up 5.8% year over year, which is an increase from 5.5% in the previous report.  We are seeing a similar pattern to last year where appreciation went negative in December and January, but to a lesser degree this year, which is why appreciation is rising year over year.

CoreLogic forecasts that home prices will be flat in February and will rise by 2.6% over the next 12 months.  It’s also worth noting that they have historically been very conservative.  They originally forecasted that we would see 3% appreciation in 2023, meanwhile we saw 5.5%.  And going back to 2021, CoreLogic forecasted home prices would decline 6.6%, meanwhile we saw 19% appreciation.

Technical Analysis

Mortgage Bonds are testing the 25-day Moving Average ceiling once again after failing to break above it the last two days.  If Bonds can get above this level, the next stop is the 50-day, a little over 30bp higher. 

The 10-year yield has temporarily broken beneath the 25-day and 200-day Moving Averages, which is a significant development.  If yields can remain beneath these levels, the next stop is the 50-day Moving Average at 4.07%.  A lot will depend on tomorrow’s ADP report and comments from Fed Chair Jerome Powell…As well as Friday’s BLS Jobs Report.