Inflation

As we approach the holiday season, the financial market offers a blend of optimism and caution, with recent inflation data and housing market insights shaping the narrative.

Inflation Data: PCE Report Brings Holiday Cheer

Today’s headline is the Fed’s favorite inflation measure – the Personal Consumption Expenditures (PCE). The PCE report delivered a pleasant surprise, aligning closely with the Federal Reserve’s target. Despite initial lukewarm market reactions, the bond market is showing signs of a rally, with mortgage-backed securities hovering below 3.9%.

The year-over-year headline inflation, including food and energy, dropped to 2.6%, beating the market expectation of 2.8%.

More crucially, the core PCE, which excludes food and energy, rose by 0.1%, with the year-over-year figure now at 3.2%, edging closer to the Fed’s 2% target.

Economic Insights: GDP, Durable Goods, and Housing Data

GDP Revision: The Q3 GDP was revised from 5.2% to 4.9%, indicating solid yet moderate economic growth.

Durable Goods Orders: These increased by 5.4% from last month, though this number can be volatile due to large aircraft orders.

New Home Sales: This data showed a significant miss, with sales down 12% month-over-month, yet the sales mix suggests more expensive homes are driving the median price up.

Jobless Claims and Consumer Confidence

Jobless Claims slightly increased to 205,000, indicating a stable labor market. The consumer confidence is surprisingly strong, potentially erasing some gains from the lower inflation data. The University of Michigan’s consumer sentiment index showed an uptick in both current conditions and future expectations.

Housing Market: A Mixed Bag

Realtor Confidence Index: Showing signs of optimism, with expectations of increased buyer and seller traffic.

New Home Sales: A decrease in sales, but the type of homes sold influences the median price, not necessarily indicating a drop in home values.

Market Trends: MBS and Treasury Yields

Mortgage-Backed Securities: There are slight fluctuations today, but the overall trend remains favorable for lower yields.

10-Year Treasury Yield: Continuing its downward trajectory, now at 3.84%, with potential to reach around 3.76-3.80%.

As we wrap up this week, the financial market presents a picture of cautious optimism. With favorable inflation data, a steady housing market, and resilient consumer confidence, the stage is set for a potentially brighter economic outlook as we head into the new year.

As we delve into the heart of this week, the financial landscape shows signs of positive momentum, influenced by global economic decisions and domestic data. Let’s dissect the key elements shaping today’s market dynamics.

Global Influence: Japan’s Decisions Boost U.S. Markets

Yesterday’s weaker bond auction was followed by a positive shift this morning, partly thanks to Japan’s decision to maintain its current monetary policy. This move has lowered Treasury yields, with the 10-year now at 3.84%, down by three basis points.

Economic Data Insights: GDP and Jobless Claims

The final Q3 GDP reading was revised downward from 5.2% to 4.9%, still robust but slightly tempered. This revision and a quarterly PCE inflation drop to 2% were well-received by the market. Initial jobless claims increased slightly to 205,000, with continuing claims remaining stable. This suggests that while employers hold on to workers, those who let find it challenging to secure new employment.

Housing Market: Realtor Confidence and Buyer Interest

Realtor optimism is rising, with expectations for increased buyer and seller traffic in the coming months. This sentiment is bolstered by the fact that bids per home have increased, even though home sales above the asking price have dipped, likely due to seasonal adjustments.

Anticipation for the PCE Report

Tomorrow’s PCE report is crucial, with estimates indicating a potential headline and core numbers drop. This report will provide the latest insights into inflation trends and is eagerly awaited by the market.

Market Trends: MBS and Treasury Yield

Mortgage-Backed Securities (MBS): MBS are showing strength, now up by five basis points. They’ve been holding steady along a Fibonacci support level, indicating room for further upside.

10-Year Treasury Yield: Continues its beautiful downtrend, now approaching another Fibonacci support level at 3.76%. A favorable PCE number could see yields gravitate toward this new support level.

Today’s market environment reflects optimism, driven by global economic decisions and domestic economic data. As we anticipate the PCE report, the market seems poised for potentially favorable shifts, underscored by a cautiously optimistic housing market and steady jobless claims.

We’ve witnessed contrasting steps by Jerome Powell and John Williams. While Powell played Santa, spreading optimism and hinting at a possible rate easing, New York Fed President John Williams countered with a Grinch-like caution, stressing the need for potential tightening. This duality in the Fed’s narrative shapes the bond and stock markets, and today, we delve deeper into these developments.

Powell vs. Williams: A Tale of Two Feds

Jerome Powell’s recent dovish stance brought cheer to the markets, suggesting a softer approach to rate hikes and acknowledging the declining inflation. However, John Williams’ subsequent comments struck a more hawkish tone, emphasizing the need for readiness to tighten further. This contrasting narrative from the Fed’s top echelons is causing ripples in the market, with initial spikes in yields being shrugged off eventually.

Decoding the Technicals: Bond Movements and Inflation Data

Despite Williams’ cautious remarks, the bond market showed resilience. Technical analysis reveals that crucial trend lines are holding, and the latest inflation data on shipping costs indicates a potential easing of inflationary pressures. Moreover, the weakening dollar has nudged oil prices slightly higher, though gas prices remain downward.

Looking Ahead: Key Economic Data on the Horizon

As we approach the holidays, the economic calendar remains packed. Housing data consistently garners attention, but next week’s spotlight will be on the Personal Consumption Expenditures (PCE) index – the Fed’s preferred inflation measure. This data will be crucial in shaping the Fed’s policy direction and market reactions.

As we navigate this holiday season, the Fed’s mixed messaging underscores the complexity of the current economic landscape. While optimism from Powell provided a temporary boost, Williams’ caution reminds us of the delicate balance the Fed must maintain. Staying informed and agile is key in this environment.