This week’s biggest to-do in terms of economic reports was this morning’s PCE inflation data.  The fact that the Fed just said it was shifting its primary focus away from the labor market and back toward inflation made PCE all the more interesting.  Thankfully, it came out lower than expected  at the core level, both in monthly and annual terms (a nice development considering yesterday’s Q3 numbers were higher than expected).  The unrounded monthly number of 0.11 was very close to the rounded 0.1%.  Bonds rallied in response, but the gains have been modest in comparison to Wednesday’s losses.

In addition to the modest response to the PCE data, it’s also important to remember that PCE isn’t the only market mover in play.  It’s the end of the week and effectively the end of the year for many traders.  Year-end trading can have it’s own impact on yields, regardless of economic data.  This could create a situation where we see selling pressure later today for no apparent reason.  That said, it could also create buying demand, but that hasn’t been the norm for this year’s suspected year-end trades.

The week’s big story is still the big jump in rates that took place after Wednesday’s Fed announcement.  And while rates remain noticeably elevated on the week due to that jump, they’re set to end the week at slightly less elevated levels. Credit this morning’s inflation data for that development! Part of Wednesday’s Fed Day drama involved a renewed focus on inflation reports.  That added to anxiety because Friday’s PCE inflation index is one of the two big inflation reports that come out each month. The bond market that underlies day-to-day interest rate movement is most focused on what’s known as “core” inflation, which discounts the more volatile food and energy components.  If month over month core inflation is running just under 0.2%, annual inflation would eventually hit its 2.0% target.  Today’s monthly core PCE came in at 0.1%, which was lower than the market expected. In year over year terms, there’s more work to do, as PCE remained at 2.8%.  The market actually expected a 0.1% increase on the annual number. In general, when reports like PCE (or its counterpoint, CPI) come in lower than expected, it puts downward pressure on rates.  Today was no exception with the average lender getting back almost half of the ground lost on Wednesday.  Top tier 30yr fixed rates are still over 7%, but only just.

Not as Bad as it Could Have Been

After Wednesday’s Fed-driven sell-off, it was unlikely if not impossible that bonds wouldn’t end up saying they had a bad week.  That is certainly still the case, but after Friday, it’s not as bad as it could have been.  PCE inflation came in at 0.1% at the core level, month over month.  If inflation repeated that performance for 12 months, annual inflation would be below the 2.0% target. Headline inflation is even lower and has been doing even better in terms of getting back to a target trajectory.  Bond traders are largely able to price in PCE data because a good amount of it can be calculated from CPI/PPI which come out 2 weeks earlier. There was still enough of a surprise for 10yr yields to drop a quick 6bps and ultimately end the day 4bps lower than yesterday.

Econ Data / Events

M/M Core PCE

0.1 vs 0.2 f’cast, 0.3 prev

Y/Y Core PCE

2.8 vs 2.9 f’cast, 2.8 prev

Market Movement Recap

09:25 AM Slightly stronger overnight with additional gains after PCE data.  MBS up 11 ticks (.34) and 10yr down 6.8bps at 4.503

01:14 PM Generally stronger, but off the highs.  MBS up 10 ticks (.31) and 10yr down 6.4bps to 4.507

01:52 PM Down just over an eighth from highs in MBS.  10yr down 6bps at 4.511

The senior vice president who played a key role in instituting an industry scorecard passes on some insights with future relevance as she prepares to depart.

Over the past two weeks, the 10-year Treasury yield, priced on market expectations, increased over 40 basis points and that is finally being seen in the Freddie Mac survey.

A Congressional Budget Office report updating one from four years ago finds 60% of its 250 scenarios will result in the Treasury getting fully repaid, up from 12%.

Lawmakers asked the company’s founder and CEO to provide details ranging from arrangements being made for former customers to his own executive compensation.

Contract closings increased 4.8% to an annualized rate of 4.15 million in November, the most since March, according to data released Thursday by the National Association of Realtors.

Just in time for the big jump in interest rates seen after yesterday’s Fed announcement, the latest Existing Home Sales data from the National Association of Realtors (NAR) shows sales at the highest seasonally adjusted pace since March.  Compared to the same time last year, sales are up 6.1%–the best year over year improvement since June 2021. To be fair to the data, it is definitely looking better than most of the past year and a half. It’s also true that adding 1 to 1 is a 100% increase while adding 1 to 100 is only a 1% increase. In other words, it’s great that we’re up 6.1% year over year–no objections there–but in broader context, we’re really just muddling through home sales purgatory. Much like our assessment of things like mortgage applications, this sideways grind at long-term lows could also be seen as a “can’t get any worse” moment.  Therefore, it can only get better. NAR’s Yun agrees, saying “Home sales momentum is building. More buyers have entered the market as the economy continues to add jobs, housing inventory grows compared to a year ago, and consumers get used to a new normal of mortgage rates between 6% and 7%.” It remains to be seen how home sales will react now that rates are back over 7%–a development is perhaps too recent to have been considered in Yun’s assessment. 

We received some anonymous feedback regarding recent rate commentary that serves as a good reminder that not everyone may be picking up what we’re putting down, or worse yet, picking up things that we never put down in the first place.   We spend a lot of time talking about how the bond market prices in the impact of Fed rate cuts on the occasions where those rate cuts are expected with a high probability–as was the case with yesterday’s cut.  Specifically, Tuesday’s rate commentary said: ” The market is already well aware that the Fed is cutting rates tomorrow and those expectations are already 100% reflected in the mortgage rates that are available today.” The hiking/cutting of the Fed Funds rate is the only variable under consideration in that comment.  The following paragraph said:  “If rates rise or fall tomorrow, it would be due to other components of the Fed announcement, such as the Fed’s quarterly rate outlook survey (officially, the dot plot in the Summary of Economic Projections, released concurrently with the rate announcement at every other Fed meeting) or the press conference with Fed Chair Powell that begins 30 minutes after the rate announcement.” This brings us to the point because, indeed, it was definitely all that “other stuff” that caused rates to surge higher yesterday. Those who want to dig into that in detail can read the full coverage here.