Current position: Carefully Floating
Stocks and bonds are both lower to start the day.
The last Fed meeting showed that the Fed is going to keep the Fed Funds Rate higher for longer. San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester spoke recently after their meeting and said they believe the Fed Funds Rate needs to get to or above 5% and stay there throughout 2023.
Are they right? Just a year and a half ago, these two were begging for more inflation and did not see it as a problem. We would not put a lot of weight in their predictions, and it will be tough to keep the FFR at such a level if inflation continues to come down and unemployment rises.
PMI (Purchasing Managers' Index)
S&P Global Manufacturing and Services PMI index fell from 46.4 to 44.6, which is the lowest print since April 2020 and is the 6th month in a row below 50 (in contraction). PMI said the numbers equate to a -1.5% annualized GDP reading for Q4... more signs of recession.
On the labor front, some layoffs were reported by manufacturers due to a lack of new work, while others chose not to replace voluntary leavers.
On the positive side, they noted that inflationary pressures in the services sector cooled notably in December, another good anecdote for inflation.
This week is full of important housing data and the Fed's favorite measure of inflation, PCE. We anticipate the PCE report to come in cooler, just as the CPI (Consumer Price Index) report did this past week. We may even see that it moves more significantly than the CPI because of shelter costs. Shelter makes up 39% of the core CPI and was one of the only components that was still adding to inflation. But in PCE, it makes up a much smaller piece of the pie, almost half that of CPI, and means we could see a greater decline in inflation.
Monday: NAHB Housing Market Index (Builder Confidence)
Tuesday: Housing Starts and Building Permits
Wednesday: Mortgage Applications, Existing Home Sales, 20 - year Bond Auction
Thursday: Initial Jobless Claims, Q3 GDP (final reading)
Friday: Personal Consumption Expenditures (PCE), New Home Sales
Mortgage Bonds are giving back their gains from Friday, and then some, but are still rangebound between a triple floor of support at the 25 and 100 - day Moving Averages 100.758 Fibonacci level and overhead resistance at the 101.67 Fibonacci level. While prices are lower, we want to give support a chance to hold. Begin the week carefully floating.