Good morning, market mavens! As we kick off the workweek post-holiday, mortgage-backed securities (MBS) are down 12 basis points—a slight rebound from earlier figures. Meanwhile, the 10-year Treasury is up six basis points, hovering at the 4% threshold. Mortgage bonds have been in lockstep with the 25-day moving average for nearly two weeks, a trend we’ll dissect shortly.
Bostic’s Take on Inflation and Rate Cuts
Atlanta Fed President Raphael Bostic dubbed Mr. Luv-a-Luv for his market influence, emphasized a prudent approach in his recent statement. As a voting member this year, Bostic’s stance is clear: inflation must be reined in towards the Fed’s 2% target before considering rate cuts. While aligned with policy objectives, this declaration strikes as a belated echo of what the market has long anticipated.
Inflation Insights: A Retrospective Glance
Our friend Peter Bookvar has highlighted Bostic’s message, emphasizing the timing mismatch of his statements. The Fed’s previous missteps—keeping rates too low for too long—may be mirrored now by a delay in rate adjustments. With inflation indicators like the PCE at 1.85% over the last six months, the trajectory suggests we are already cruising toward the sub-2% target.
Rental Market Reflections
Turning to the rental sector, which significantly influences the shelter component of inflation metrics, we anticipate more accurate data in the coming months. CoreLogic’s report indicates that blended annual rent increases have moderated to around 2.7%. This is a notable deceleration from last year’s 7.5% rise, suggesting a cooling trend in rent inflation.
PCE vs. CPI: The Divergence
The upcoming PCE and CPI releases will shed more light on the inflation landscape. The difference between these readings and real-world impacts is stark, and it appears the Fed may be late again—but this time in cutting rates. A mathematical dive into the weightings of CPI and PCE components reveals we’re closer to a 2.4 – 2.3% core rate, aligning us more firmly with the 2% inflation goal.
The New York Manufacturing Index: A Warning Signal
The New York Manufacturing Index, a barometer for the manufacturing sector’s health, has plunged to -43.7, signaling a contraction not seen since 2001, excluding the COVID period. This points to a bifurcated economy: while some sectors fare well, manufacturing is undoubtedly in a recessionary phase.
Looking Ahead: Retail Sales and Resistance Levels
Tomorrow’s retail sales data will be closely watched, with expectations for a modest uptick. As for the MBS, continue to track the 25-day moving average—a resilience that may hint at underlying market stability despite recent dips. The 10-year Treasury faces resistance at the 25-day moving average, with the 200-day mark and Fibonacci levels as distant hurdles. While technical indicators suggest potential volatility, the fundamentals emphasize a stabilizing environment.
As we digest these indicators, the message is clear: economic prudence is paramount in times of uncertainty. The Fed’s navigation through inflation targets and rate decisions will be critical in shaping the market’s path forward.
