As love permeates the air this Valentine’s Day, the financial markets are also feeling a touch of affection, courtesy of Austin Goolsbee, the President of the Chicago Federal Reserve. In an attempt to soothe the markets after a tumultuous day, influenced by an unexpectedly high Consumer Price Index (CPI) report, Goolsbee stepped in with a message of hope and clarification. Mortgage-backed securities show signs of recovery, inching up four basis points, while the 10-year yield has modestly declined by one basis point. The stock market, too, is on a path to recuperation, hinting at the calming effect of Goolsbee’s morning comments.
Interpreting CPI and Fed Rate Expectations
The recent CPI report sent shockwaves through the market, adjusting the lens through which future Federal Reserve rate cuts are viewed. Prior to the report, there was a more than 50% expectation of a rate cut by the May meeting. However, post-report, this expectation has cooled down to just 30%, with June now being the earliest anticipated meeting for such action. Goolsbee emphasized the Fed’s focus on the Personal Consumption Expenditures (PCE) rather than the CPI for its inflation target, noting the PCE’s lower shelter cost weighting and its more accurate reflection of real-world trends.
Goolsbee’s Dovish Stance: A Signal to Markets
Goolsbee’s remarks underscored a flexible approach to reaching the 2% inflation goal, suggesting that the Fed’s current restrictive stance could see adjustments before inflation hits the target mark. He downplayed the significance of recent CPI blips, reinforcing the notion that the overarching trend of declining inflation remains intact. His dovish tone served as a balm to the markets, reinforcing the message that, despite occasional upticks, the trajectory towards the Fed’s inflation goal is steady.
Housing Market Dynamics: Zillow’s January Report
Adding to the day’s optimistic outlook, Zillow’s January housing report provided a snapshot of a market where well-priced homes are selling briskly, averaging 29 days on the market. The report also highlighted a slight reduction in price cuts compared to the previous year, with a notable 26% of homes selling above the asking price, reflecting robust competition and a significant increase from pre-pandemic levels. Despite an increase in new listings, overall inventory remains tight, underscoring the ongoing challenge of low supply in keeping home prices buoyant.
Looking Ahead: Mortgage Applications and Economic Indicators
The mortgage landscape continues to evolve, with purchase applications dipping slightly but refinance activity showing resilience. The upcoming week promises further insights into consumer confidence, retail sales, and housing starts, offering a fuller picture of the economic landscape as we navigate through February. Additionally, the Producer Price Index (PPI) report looms on the horizon, with the potential to further influence Fed policy and market sentiment, especially in relation to the core PCE.
Technical Take: Navigating the Securities and Treasury Yields
Goolsbee’s dovish comments have brought some stability to mortgage-backed securities, yet technical challenges remain. After yesterday’s decline below the 200-day moving average, this level now presents a formidable resistance. The 10-year yield, having breached several resistance levels, now teeters just below the 100-day moving average. The market’s ability to recover from these positions could set the tone for the coming days.
As we move through Valentine’s Day with renewed hope, the market’s response to Goolsbee’s commentary and the latest economic reports suggests a cautious optimism. The intersection of monetary policy, housing market trends, and forthcoming economic indicators will continue to guide investor sentiment and strategic decision-making. Today, as we float in anticipation of further recovery, we’re reminded of the intricate dance between policy, market response, and the ever-evolving economic narrative.
