Market Update: Shifting in tone from the Feds causing 10 yr yields to drop improving rates
Consumers are out of savings; however, wage growth and a current strong job market is keeping spending going for now. I expect this to cool further with an increase in job loss. I expect to see the large drops in January and into February. I have a feeling that the wage growth and strong job market will carry us through the holidays.
Student loan payments started back up, but I am seeing multiple requests come through portfolio whereby borrowers are saying they are getting their loans forgiven. Personally, I think this is complete BS. Everyone else had to work to payoff student loans, no reason why today’s generation does not. It truly is unbelievable that this is occurring in our country. We are talking about running out of funds in Medicare for people that paid into it for their entire lives, but we are going to forgive student loan debt for people who made “adult decisions” to take on that debt. This is not a political statement, but this is the reason my outlook is not positive for this country. We groom people to not take responsibility for their actions and if this is not the dumbest fiscal policy of our government, I don’t know what is. Truly unbelievable the sacrifices that people in their 40’s – 70’s have made over the years to pay off their student loans and now we are grooming people to think that debt should be forgiven. I am happy to hear another side of the argument here, but I cannot process the rationality on how this is ok. So, I don’t know if student loan payments are being made, or, if they are all being forgiven behind the scenes by the jackasses in Washington.
The 10 yr overnight dipped as low as 4.27, I think. it is back up to 4.29 now, but we have busted through the prior 4.36 resistance level, the 4.33 1 month low and now through the 4.30, but barely, so we will have to wait and see if it holds.
Much of the rally was caused by Waller, a Hawkish Fed official has changed his tune and not only likely signaled no more increases, which I have previously made clear will decrease yields as soon as this is made clear substantially, but also signaled at cuts.
Bowman also adjusted her tune. But that lady is so far off her rocker, I don’t know why anyone would listen to her. She is a lawyer I believe, not even an economist and it shows. Here is a clip from Seeking Alpha this morning.
“Dovish signals from the Federal Reserve are reinforcing what traders have been pricing in since the end of October, when the central bank held rates for the second consecutive meeting and a dot plot – that suggested one more hike – was called into question. Since then, stocks have risen at a rapid clip, with the S&P 500 (SP500) climbing out of correction territory in only 16 trading sessions, marking its fastest comeback since the 1970s. Besides lifting markets and risk assets, the prospect of cheaper money saw the 10-year Treasury yield drop overnight to below 4.30%, after touching 5.00% just prior to the last Fed meeting.
The latest: Two of the most hawkish FOMC officials, who led the charge for higher rates last year, are getting comfortable with holding policy steady, backing expectations that the central bank’s hiking cycle is done. Fed Governor Christopher Waller said Tuesday that he’s “increasingly confident” that monetary policy is now in the right spot to slow the economy and bring inflation back down to the 2% target. Governor Michelle Bowman also stopped short of endorsing an increase next month, conditioning the need for further hikes only on incoming data that “indicate progress on inflation has stalled or is insufficient to bring inflation down to 2% in a timely way.”
Today is the second revision to GDP from Q3 at 8:30 am EST. Initial reading was 4.9%, which was very high. Any adjustment down, will cause a rally in bonds likely,
Tomorrow is the Fed’s favorite inflation reading, PCE. CORE PCE will be the focus, as we know energy has come down for headline PCE will show very material gains. CORE PCE is expected to drop from .3% last month, to .2% this month. This is a 2.4% annualized rate of inflation if it comes in at consensus. Anything under, especially after a potential downward revision to GDP if it is material, will maybe give the legs needed to move yields further towards the 4% threshold. I do see a path to the 3.70 – 4.00 range on the 10 yr, which likely has mortgage rates improve by 200 – 300 BPS in price in the next few weeks if the data cooperates.
Thursday’s job readings are part of that cooperation requirement. We need to see a jump back above the 230k and ideally the 240k marker. Either will cause the downward momentum, 240k may cause a lot.
If this occurs and Friday’s ISM manufacturing index drops below the 47.0 expected, signaling further contraction (remember, below 50 is contraction), this rally will continue likely through the weekend.
The chances of 100% of this aligning are less than 50%. There is no indication job numbers will jump to 240k at this time.
Josh Erskine
Chief Executive Officer
CalCon Mutual Mortgage LLC dba OneTrust Home Loans
Yellowstone RE Holdings LLC
Yellowstone Global Investments LLC
