Market Insights: Navigating the Inflation Maze and Housing Resilience

Let’s embark on today’s journey through the economic labyrinth, where we decode the latest on inflation, scrutinize the bond market’s resistance encounter, and unpack the resilience in the housing sector. Join me as we navigate these twists and turns!

Bond Market: Facing the 200-Day Moving Average Challenge

The bond market received what should have been favorable news, but mortgage-backed securities didn’t rally as hoped. They’ve hit the proverbial wall at the 200-day moving average, and now we’re left wondering if they’ll break through or add to this resistance. The 10-year Treasury yield, albeit increasing slightly, is taking a breather after a notable run.

Inflation Data: A Closer Look

Personal Consumption Expenditures (PCE): The Fed’s favored inflation gauge improved. The headline inflation was flat month-over-month, likely aided by declining energy prices. Year-over-year, the headline inflation eased from 3.4% to 3.0%.

Core PCE: While the trajectory is heading in the right direction (down from 3.7% to 3.5% year-over-year), it’s still above the Fed’s 2% target. However, considering the substantial drop from its peak (6.7%), the trend is encouraging.

Shelter Component: The Hidden Drag

The shelter component of the PCE remains a significant contributor to inflation, showing a year-over-year increase of 6.7%. Our analysis suggests that the actual impact might be closer to 2.5-3%, indicating a potentially overstated inflation figure.

Labor Market and Consumer Spending: Signs of Cooling

Jobless Claims: Initial jobless claims rose to 218,000, with continuing claims hitting 1.9 million – the highest since November 2021. This uptick suggests a slowdown in hiring.

Consumer Spending: While income and spending increased by 0.2%, the trend indicates a cooling from previous highs, likely pointing towards weaker future GDP numbers.

Fed Governors’ Divergent Views and Market Reaction

The Atlanta Fed President’s remarks about the slowing economy and declining inflation are noteworthy, especially considering his upcoming voting status in 2023.

The bond market is closely watching the Fed’s potential rate cuts and the halting of quantitative tightening. The PCE report’s six-month run rate of 2.4% is crucial in this context.

Housing Market: Pending Home Sales and Redfin Insights

October saw a 1.5% decline in signed contracts on existing homes, which was less than expected. This resilience in the face of high mortgage rates and limited inventory is noteworthy.

The Redfin Home Price Index for October showed a 0.7% increase, aligning with the general trend of housing market appreciation.

Technical Analysis: The Charts Speak

The 10-year Treasury Yield is currently at 4.26%; the yield is showing signs of stabilizing. There’s a cautious optimism that this trend might continue, supported by multiple resistance levels.

Mortgage Bonds are at a critical juncture, battling against a formidable resistance level. The next few days will be crucial in determining their trajectory.

The financial landscape presents a complex picture – inflation data shows promise, but the bond market remains hesitant. The housing market shows surprising resilience, and the labor market suggests a cooling economy. As we look ahead, the key will be to monitor how these disparate elements interact and influence the broader economic outlook.

Today’s Financial Update: Divergent Views at the Fed and Market Movements

Today’s buzz in the financial world revolves around the latest from the Federal Reserve and the significant movements in the housing and bond markets. Let’s decode the messages from the Fed governors and their impact on the market.

Fed Governors: A Tale of Two Perspectives

The Federal Reserve, the central bank of the United States, is under the microscope with conflicting signals from its governors. On one side, we have Chris Waller, a PhD in economics, presenting a more measured outlook. Contrastingly, Michelle Bowman, with her legal background and limited financial experience, paints a different picture. These divergent viewpoints remind us of the ‘Two Princes’ hit by the Spin Doctors – two key figures, two distinct narratives.

Waller’s Optimism vs. Bowman’s Hawkish Stance

Waller’s comments hint at a potential policy shift, suggesting rate cuts as early as spring if inflation continues downward. This dovish stance contrasts sharply with Bowman’s hawkish outlook, reflecting her limited understanding of economic dynamics.

Market Movements: A Close Look at the Numbers

GDP Insights: The Q3 GDP saw an uptick at 5.2%, driven mainly by government spending. However, the bond market remained unfazed, likely due to declining consumer spending – a positive sign for inflation.

Redfin’s Housing Data: The Redfin Home Price Index reported a 0.7% increase for October, indicating continued appreciation in the housing market.

Mortgage Applications: There’s a mixed bag here, with purchase applications up by 5% week-over-week but down 19% year-over-year. Refinances dipped 9% week-over-week but showed a slight year-over-year increase.

Bond Market’s Reaction and the PCE Report

The bond market is currently focused on the next Fed rate cut and the cessation of quantitative tightening. The upcoming PCE report is highly anticipated, with expectations of a decline in core inflation readings. The 10-year Treasury yield, now at 4.26%, shows a significant drop from recent 5% highs, reflecting market optimism and potential for further improvement.

The Critical PCE Report and Its Potential Impact

The PCE (Personal Consumption Expenditures) report will be a critical factor in shaping market expectations. With a forecasted dip in headline and core readings, the financial world is on tenterhooks, waiting to see how this will influence the Fed’s next move.

Mortgage Bonds: A Battle of Ceilings and Floors

In the mortgage bond arena, we’re witnessing a tough tussle. A critical struggle is underway between the Fibonacci level and the 200-day moving average. The outcome of this battle will likely hinge on the PCE report, with a positive outcome propelling the 10-year yield towards 4%.

A Mixed Bag with a Glimmer of Hope

The financial landscape is a kaleidoscope of divergent views within the Fed, market reactions to economic indicators, and anticipation of future rate movements. As we navigate these complex waters, the key takeaway is cautious optimism, with an eye on the upcoming PCE report as a potential game-changer.

Today’s Financial Digest: Steady Gains and the Golden Insights from Case Shiller

As we delve into the latest in the mortgage and real estate sectors, let’s take advantage of the forest for the trees. Today’s highlight? Despite the market’s rollercoaster, the much-awaited Case Shiller and FHFA figures show a resilient housing market.

MBS and Treasury: A Gentle Dance of Numbers

After a fruitful day, mortgage-backed securities are retracing their steps slightly, down by eight basis points. The 10-year Treasury yield, on the other hand, is inching up, marking a modest two basis point rise. We’ll keep an eagle eye on these as the day progresses.

The Golden Standard of Housing: Case Shiller Speaks

Case Shiller, the beacon of the housing market, has spoken, and it’s music to the ears of those fearing a downturn. Despite the brewing storm of skepticism, home values have stood their ground. The September figures are in, with Case Shiller reporting a 0.7% gain and FHFA a close 0.6%. These numbers, reflective of the July-August house-hunting period, are especially notable considering the mortgage rates hovering around 7 to 7.5% then.

Year-Over-Year: A Story of Strength

Year-over-year, the figures are even more telling. The appreciation, at a comfortable 6-7%, falls sweetly in the expected range. However, let’s not forget the typical softening in Q4 – a seasonal adjustment as regular as the tides.

Other Indices: The Broader Picture

CoreLogic and Black Knight align with the positive trend, while Zillow, the spring outlier, might just be playing catch-up with its unique data methodology. The key takeaway? Case Shiller’s tracking of historical home price movements remains the most reliable barometer.

The Rental Market: A Welcome Respite

Apartment List’s latest rental report adds another layer to this intricate tapestry. November saw a 0.9% decline in new rents, marking the fourth consecutive monthly decrease. This downward trend is a positive signal for those tracking inflation, hinting at potential relief in upcoming CPI and PCE reports.

Charting the Course: MBS and the 10-Year Outlook

A glance at the charts reveals that MBS is navigating through a wide range, with potential swings in both directions. The 10-year yield, currently at 4.41%, has breached a significant Fibonacci level, opening a path to lower yields, possibly nearing the 4% mark.

In summary, the latest financial indicators paint a picture of a strong housing market that defies the odds. With the Case Shiller report shining bright and the rental market showing signs of cooling, we’re looking at a landscape filled with stability and opportunity. As always, we recommend a strategic approach, keeping an eye on the ever-evolving market dynamics.