Current position: Carefully Floating
Stocks and mortgage bonds are both moving lower so far this morning after a hotter than expected PCE (Personal Consumption Expenditures) report.
PCE (Personal Consumption Expenditures) Inflation Report
The Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that inflation rose 0.6% in January, which was hotter than estimates. Year over year, the index rose from an upwardly revised 5.3% to 5.4%.
The core rate, which the Fed focuses on and strips out food and energy prices, also rose 0.6% last month and increased from an upwardly revised 4.6% to 4.7%.
Both of the year over year readings were above estimates and moved in the wrong direction. Oil prices rose 2% in the month, which did not help. As we have been seeing, goods prices continued to decline, but service inflation remained stubborn and accelerated. As we have mentioned before, our good friend Lacy Hunt warned that there could be an upward surprise in this report due to a yearly adjustment to medical care cost contracts that turnover. It's unclear how much of an impact this had, but it could have been a key factor.
We have to get through these times to next month, where we hope we get friendlier jobs data on March 10 and favorable inflation data on March 14.
Looking deeper into the report, personal income rose 0.6% in January, while spending rose 1.8%. This is likely part of the reason why we saw retail sales increase in January and may have been impacted by the COLA (cost of living adjustment) adjustments that took place in January, where those on Social Security got a 9% raise.
New Home Sales
New Home Sales, which measures signed contracts on new homes, rose 7.2% in January to a 670,000-unit annualized pace, which was much stronger than estimates and follows a 7.2% gain in December. Year over year, sales are down 19.4%.
There were 439,000 new homes for sale at the end of January, which is down 5% from the previous month. At the current pace of sales, there is a 7.9-month supply. However, only 68,000, or 15%, are completed. When looking at the pace of sales vs. homes that are completed (available supply), there is only a 1.2-month supply.
The median home price fell 8.2% last month to $427,500, but this can be skewed due to the mix of sales. Year over year, the median home price is down 0.7%.
Overall, this was the second strong report in a row, so how are builders having success? Listening to the earnings calls from some of the largest US builders, over 60% of them cited incentives and 2-1 buy downs. Do what the builders are doing: make sure you are using the seller contribution tool under Loan Advisor.
Monday: Durable Goods Orders, Pending Home Sales
Tuesday: Case Shiller HPI, FHFA HPI (Appreciation Reports)
Wednesday: Mortgage Apps, ISM Manufacturing PMI
Thursday: Initial Jobless Claims
Friday: ISM Services
Mortgage bonds have broken back beneath support at the 99.711 level and have been trying to form a base the last few days at 99.50. The 10-year is trading at 3.95%, which also appears to be an interim ceiling of resistance for the last few trading sessions. Begin the day carefully floating as we try to get through this time until potentially Bond-friendly news in the second week of March.