Current position: Locking Bias
Stocks and Mortgage Bonds are both higher to start the day.
Yesterday's Fed Meeting
The Fed unanimously hiked 25bp, as expected, bringing the Fed Funds Rate to a range of 4.5% to 4.75%. The Fed has hiked rates by 4.5% since they started last March.
Powell signaled that two more hikes would be appropriate, each at the 25bp level, which would be in line with the December projections the Fed released, showing they believed the terminal rate to be between 5% to 5.25%.
He also acknowledged that inflation has been coming down. He said that the recent developments have been encouraging, but more work needed to be done. He also said goods prices are moving lower and that housing services disinflation is in the pipeline, meaning we have not seen deflation from shelter yet but will in the coming months. This should sound familiar, as it's exactly what we have been saying, due to the lag. Powell gave a nod to wage pressures easing but said that core services, such as shelter, have yet to improve. This is the metric they are most focused on currently, and one we have to watch.
The next Fed meeting is March 22, where it is expected they will hike another 25bp and release their new projections.
The European Central Bank and Bank of England hiked their central bank rates by 50bp...but they are well behind the US and likely have more hikes to come. The ECB rate is at 3%, while the BOE rate is at 4%—well below the US.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 3,000 to 183,000. Continuing Claims, or those that continue to receive benefits after their initial claim, decreased 11,000 to 1.66M. We are continuing to see a tight labor market, where companies are doing their best to hold onto workers, but once they are let go, they are having a hard time finding new work. And the last Jobs report showed us that even though people are not getting let go, hours are being reduced.
Job Cuts
It's unclear how long the strength in claims will continue, as we did see a lot of job cuts in January.
There were roughly 103,000 cuts, which was a 136% increase from December. The technology sector announced the most cuts with 41,829, 41% of all cuts announced in January. Retailers announced the second-most cuts in January with 13,000, and the real estate industry cut 2,191 last month. The construction sector announced 1,138 cuts last month.
Productivity
Worker productivity increased 3% in Q4, which was well above estimates. As a result, unit labor costs only rose by 1.1%, which was below estimates of 1.5% and about half the 2% increase seen previously. This is good for the inflation picture.
Jobs Report Strategy / Technical Analysis
Tomorrow's big BLS Jobs Report will be reported at 8:30 a.m. ET. The market is expecting 185,000 job creations and for the unemployment rate to increase from 3.5% to 3.6%. ADP only showed a bit over 100,000 jobs created, but claims have been strong (low).
It's always difficult to handicap the jobs report, as there are a lot of moving parts, it's old data, and it's subject to big revisions. We have seen a nice move higher in Mortgage Bond prices, but now we are up against a stiff ceiling of resistance at the 200-day Moving Average. The 10-year has moved down to 3.33%, right up against its 200-day Moving Average. The 200-day is a very formidable technical level, as each plot is the average closing price of the previous 200 days, so breaking it is often tough and signals a sea change. It's very possible to see things reverse from these levels, at least in the interim. While our outlook is for rates to continue to improve over the next several months, it will not be in a straight line.
With the headline risk of the jobs report, the nice gains we have seen, and tough technical levels, we feel it's prudent to be cautious here and capture some of the improvement in Mortgage Bonds - While things could continue to get better, we believe the risks favor a locking bias.
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