Weekend Talking Points - 'Waiting'

Authored By:
Scott Bradley Brixen
John Smith
January 1, 2023
5 min read

It was an incredibly volatile week, with the bond market reacting violently to higher than expected January CPI inflation, and then partially recovering on dovish comments from Fed President Goolsbee and weaker than expected January retail sales.

What drove the bond market down?
CPI seemed OK at first. The “headline” CPI (Consumer Price Index = inflation for you and me) for January 2024 came in at +3.1% year-over-year, down from +3.4% YoY in December 2023. The “core” CPI (which excludes food & fuel prices), meanwhile, was flat at +3.9% YoY. So there was some progress, but not a lot. [BEA]

But it wasn’t OK. The market was expecting +2.9% YoY for “headline” and +3.7% YoY for “core”. So there was immediate disappointment. And when people looked closer at the numbers, they saw that “headline” inflation had risen 0.3% month-over-month in January 2024 while “core” climbed 0.4% MoM. Both figures suggested a reacceleration of inflation. [BEA]

Gimme shelter? We have frequently discussed the importance of “shelter” costs in CPI (36% of “headline” and 45% of “core” inflation). Well, “shelter” costs rose 0.6% MoM in January 2024, reaccelerating from +0.4% MoM in each of the prior two months. With that kind of move in an item that represents nearly one-half of the “core” CPI, we were never going to get a good overall number. [BEA]

The bond market puked. Revolted by the apparent reacceleration in inflation, and still nauseous from the blowout January BLS employment report, the bond market ran to the guardrails and emptied its belly of rate cut hopes. 10-year US Treasury yields jumped over 4.3% and the prices of mortgage-backed securities plunged. The market has now almost completely “priced out” any rate cut in March, and is only putting a 40% probability of one in May. [MBS Highway]

Back above seven. Average 30-year mortgage rates followed bond yields higher, lifting above 7% for the first time since early December 2023. The timing is not good. Spring selling season is around the corner. Let’s just hope that the next PCE inflation report — which the Fed cares much more about, and which assigns a lower weighting to “shelter” costs — on February 29th delivers a more helpful message. [Mortgage News Daily, CME]

What helped the bond market recover?
Goolsbee lends a hand. The day after the CPI release, Chicago Fed President Austan Goolsbee — speaking at the Council on Foreign Relations — reminded the audience (and the market) that: 1) one month of slightly higher inflation doesn’t alter the downward trend, and 2) the Fed is focused on “core” PCE, not “core” CPI. He also reiterated his view that the Fed should not wait until inflation hits its 2% target before beginning to cut rates. [Reuters]

Have the shoppers finally dropped? Retail sales for January 2024 fell 0.8% month-over-month. That was much worse than expected, and represented a dramatic turnaround from the +0.4% MoM booked in December 2023. [Census Bureau]

Other notable news
Activity picking up regardless. The MBS Highway Housing Survey for February 2024 witnessed a massive +13 point jump in the national index to 55 (above 50 = expansion). This was driven primarily by a +16 point move in the buyer activity sub-index. More on this later. [MBS Highway]

Zillow says do your home shopping early. With more homes available for sale (total inventory +3% YoY, new listings +6% YoY), and a higher than normal % of listings with price cuts (20.9%), the property portal suggests that you might want to beat the spring rush. [Zillow]

Builders getting bulled up. The National Association of Homebuilder’s confidence index climbed 4 points to 48 in February (above 50 = bullish). That’s the highest level since August 2023, and is the third straight month of improvement. [NAHB]

The 40-year-old maison. The median age of owner-occupied homes is now 40 years old, a figure that has been rising for two decades. Why? Because new home construction hasn’t kept up. What does this mean? We’re all going to be doing a lot more renovation. [NAHB]

Mortgage Market

This was an ugly week for mortgage rates, with the bond market reacting violently to the higher than expected January CPI. Average 30-year mortgage rates, which had already risen from 6.5% to near 7.0% in recent weeks, broke through and climbed to 7.13%.

There was some relief later in the week, with comments from Chicago Fed President Austan Goolsbee soothing the market on Wednesday, and retail sales for January coming out much weaker than expected on Thursday. However, mortgage rates remained above 7%.

The next Fed rate decision is on March 20. The Fed Funds futures market is currently pricing in a 90% probability that the Fed will do nothing, and a 10% chance of a 25 bps cut. For the meeting on May 1, the probability of another “no cut” is now 60%.

They Said It

“Even if inflation comes in a bit higher for a few months…it would still be consistent with our path back to target. I don’t support waiting until inflation on a 12-month basis has already achieved 2% to begin to cut rates.” — Austan Goolsbee, Chicago Federal Reserve President

“Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers. And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year.” Alicia Huey, NAHB Chairman

“The risks are real. The federal funds rate is up 5.25 percentage points within two years, and that has put pressure on the housing market. In fact, the Fed is pushing up home prices, because the people who have low, fixed-rate mortgages are unwilling to sell. So new homebuyers are grappling with higher mortgage rates, high home prices and a lack of homes to buy. So far, the rest of the economy has been able to keep the weakness in housing from spreading, but that is not guaranteed to continue.” — Claudia Sahm in the Financial Times (2/14/2024)

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