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.
