Current position: Carefully Floating
Stocks are higher and Mortgage Bonds are slightly lower ... even though we got the inflation data we were looking for. The PCE gift was stolen by a new funding bill and some revisions to the previous report and a new funding bill, which must be paid for and can be inflationary.
After passing the Senate, the U.S. House of Representatives will vote today on a $1.66 trillion government funding bill that provides more money for Ukraine's defense, restricts the Chinese - owned TikTok app and reforms presidential election certification. Because this is bipartisan, it is expected to pass. The problem with this bill is that it has to be paid for, and the way we do that in the US is to issue more Treasuries.
PCE (Personal Consumption Expenditures) Inflation Report
The Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that inflation rose 0.1% in November and 5.5% year over year. The previous report was revised higher from 6% to 6.1%, and while this was a nice drop, it would have been 5.4% without the revision.
The core rate, which strips out food and energy prices and is the main focus of the Fed, rose 0.2% and 4.7% year over year, which is a moderate change from the 5% seen in the previous report.
There is still more work to be done, as the Fed wants core PCE to reach 2%, but it's made a nice improvement from the peak of 5.4% in February, and we anticipate this to gradually continue to move lower one report at a time. The headline number peaked at 7% in June and has now moved to 5.5% , a 1.5% decline. If you were to annualize the last few months' readings, it would equate to a 3% inflation rate.
We also believe we could see more meaningful drops in January/February, as the shelter data should catch up and start to be deflationary.
New Home Sales
New Home Sales, which measure signed contracts on new homes, rose 5.8% in November to a 640 - unit annualized pace. This was much stronger than estimates that were looking for a 4.7% decline. Last month's figure was revised lower, which made the gain today appear bigger. When taking that into account, sales still rose by 1.3%. Sales are now down 12.3% from last year. Since rates continued to improve in December, we expect the next report to show more activity. Next week, the more important Pending Home Sales report will be released, showing buyers signing contracts on existing homes in November. And since rates did drop in October, it will be interesting to see if we see a pickup in activity like we saw in today's report.
There were 461,000 new homes for sale at the end of November, a drop of 2.3% from October. At the current pace of sales, there is an 8.6 month's supply. However, only 64,000 or 14%, are completed. When looking at the pace of sales vs homes that are completed, there is only a 1.7 months' supply.
The median home price fell 3% last month to $471,000, but this can be skewed due to the mix of sales. There was a big uptick in sales of homes in the $500,000 and over segment. On a year over year basis, the median home price is 10% higher.
Leading Economic Indicators
The Conference Board Leading Economic Index decreased by 1% in November, following a decline of 0.9% in October. The LEI is now down 9 months in a row, and when looking at the index, it has fallen well below the 50 mark, while the last 6 months' diffusion index has fallen below -4%. Looking back at the last three recessions, every time we have seen it drop below this level, there was a recession in short order.
Adding to more weakness in the economy - Durable goods orders were released for November, and the index came in at -2.1%. This was even weaker than the -0.6% expected and is another sign that the economy is slowing.
The markets will be closed on Monday in observation of the Christmas holiday. The rest of the week looks like this:
Tuesday: Retail Inventories, Case Shiller Home Price Index, and FHFA House Price Index
Wednesday: Mortgage Apps, Pending Home Sales
Thursday: Initial Jobless Claims
Friday: No news; early market close
Mortgage Bonds are battling with a dual floor of support at the 100 - day Moving Average and 100.758 Fibonacci level. The 10 - year is higher, trading in a wide range between support at 3.65%, which is a Fibonacci level, and overhead resistance at the 50 - day Moving Average. There is a lot of room for yields to get worse, so we have to proceed with caution. But with Mortgage Bonds managing to remain above the dual floor of support, we can be patient for now. Begin the day carefully floating.