Current position: Floating Ahead of Tomorrow's Jobs Report
Stocks are higher and Mortgage Bonds are trading near unchanged levels after a very strong day yesterday, following Fed Chair Powell's speech.
Powell said that smaller interest rate increases could start as soon as the December 14 meeting. This solidifies a 50bp hike at the next meeting, as we have been hearing from so many other Fed members. He tried to continue to talk tough, saying that there was more work to be done and that the Fed Funds Rate would end up higher than previously stated, but this was a big change in his tone.
While some out there were saying there was nothing new in this talk, he has pivoted and was clearly less hawkish. He also said that the cumulative impact of the hiking rate from zero to 4% has not been fully realized because of the lag. Powell may be an early look at the inflation data, which may have influenced his tone. We hope that he is starting to see the light! As a result, Bonds rallied sharply.
Personal Consumption Expenditures
The Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.3% in October, which was in line with estimates. The year-over-year reading declined from 6.3% to 6% and is down from the peak of 7% in June.
The core rate, which strips out food and energy prices, rose by 0.2%, which was below estimates of 0.3%. Core PCE fell from 5.2% to 5% on a year-over-year basis, which was in line with expectations. This is down from the peak in February at 5.4%.
Inflation is heading in the right direction and will continue to do so - We expect interest rates to improve one inflation report at a time.
The Bond market rallied almost 80bp yesterday... We got the Bond market reaction we wanted but it came yesterday after Powell's talk and in anticipation of a cooler inflation reading today. Bonds are only slightly higher this morning, but we got the move we wanted.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, decreased from 16,000 to 225,000. It's important to note that this is still a new crop of people filing for unemployment benefits from last week. Additionally, last week was Thanksgiving, and if it were not for a holiday, initial claims would have likely been higher.
And once they are let go , they are having a hard time finding a new job. This is evidenced in Continuing Claims or those that continue to receive benefits after their initial claims, which rose 57,000 to 1.61M. This is a good figure as it is measuring two weeks ago. They have now increased by more than 260,000 over the last 8 weeks and are at the highest level in 9 months.
The Challenger Cut Report showed that there were 77,000 job cuts in November, with the majority in the tech sector. There were 53,000 jobs cuts in tech last month, for a total of 81,000 this year. This is the highest amount of cuts in a month and cumulatively for the year in over 20 years.
Apartment List National Rent Report
Apartment List reported that rents fell 1% in November, the third straight monthly decline. The decline is consistent with what we have seen seasonally in the past, but year over year, rents have moderated to up 4.7%. This is well off the 18% pace we saw at the peak. Additionally, the vacancy rate has increased from 4.7% at its low to 5.7%... still below the historical norm but showing a softening in the rental market.
Shelter costs are the biggest component of the inflation reports we receive, but they have still been adding upward pressure because of the lag, even though in the real market shelter costs are coming down. We think this starts to get realized in January / February and will start to really help inflation come down more significantly.
Jobs Report Strategy / Technical Analysis
Tomorrow's big BLS Jobs Report will be reported at 8:30 am ET. The market is expecting 200,000 job creations and for the unemployment rate to remain at 3.7%... but we think there is a good chance the figure is weaker and the unemployment rate moves up to 3.8%, especially after the weaker ADP Employment Report.
After yesterday's rally, Mortgage Bonds busted through the 100 - day Moving Average and closed above it. They back-tested that level this morning, as it is now acting as support, and are continuing higher. There is a lot of room to the upside, almost 150bp, until the next ceiling at the 102.788 Fibonacci level.
The 10 - year Treasury yield broke beneath the 3.67% floor yesterday and hit another one of our targets this morning at 3.57%. If they can break beneath it, the next stop is the 100 - day Moving Average at 3.44%. if yields turn higher, 3.67% will now act as a ceiling.
It's important to note that Bonds are overbought and Yields are oversold, meaning that the momentum indicators could point to a reversal if we don't get a Bond-friendly Jobs Report tomorrow. The Jobs Report is always a risk, and even though everything is pointing to a weaker report, you never know and it's something to consider when advising clients, especially after the big rally we have seen. Continue floating ahead of tomorrow's Jobs Report.
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