Builders Starting to Feel More Confident

Stocks are higher and Mortgage Bonds are flat so far this morning.

The NAHB just released their builder confidence report, showing that builders are feeling more confident about the future, thanks to lower rates and their expectation that the Fed will continue to cut and mortgage rates will fall further.

Overall, the index increased 5 points to 37, which is an improvement, but still beneath 50, which is the line in the sand between expansion and contraction.

Future sales expectations, however, rose 9 points to 54, back in expansion territory for the first time since January. Traffic improved 4 points to 25, but is still at low levels.

Fed’s Beige Book & Waller

The Fed’s Beige Book, which is a compilation of comments from the Fed’s businesses in each of their 12 districts, shows that there are signs the economy is slowing and that the unemployment rate could begin to rise further.

Of the 12 districts, three districts reported slight to modest growth in economic activity, five reported no change, and four noted softening activity. This is big change from the previous Beige Book, where zero districts said that activity was contracting.

On the labor market, most districts said that employment levels were stable and that demand for labor was weak. But the most notable comment was that layoffs had begun to increase in several districts.

Many Fed members have been hanging their caps on the fact that even though there is less hiring – or outright job losses three out of the last four months from ADP – the supply side is also falling due to immigration changes, which is why the unemployment rate has only edged higher. However, if firings begin to pickup and show in the hard data, matching what the Beige Book is depicting, the unemployment rate could rise quickly because there is no absorption from hiring. This is something to keep a close eye on, especially once the shutdown ends.

Fed Governor Waller spoke this morning, and he expressed his support for a 25bp cut later this month on October 29. He also said that he believes the neutral Fed Funds Rate, where they are not being restrictive nor accommodative to the economy, is 1% to 1.25% beneath current levels. That means in his mind, the Fed could do four to five 25bp cuts and still not be accommodative.

Waller does believe the Fed should move at a measured pace and not too quickly, because he is seeing a dichotomy in the data. Meaning that the labor market is weak and GDP is showing strength, so either GDP has to move lower or the labor market has to rebound so they come into balance.

Technical Analysis

Mortgage Bonds are little changed and are being squeezed in a narrow range between support at the 25-day Moving Average and overhead resistance at 101.11. Bonds have tested 101.11 over the last three days, and while there were periods they broke above it intra-day, they have been unable to close above it. A close above resistance would be a positive sign, as there is roughly 20bp of room to the upside.

The 10-year is trading in a wide range between the 25-day Moving Average resistance level and support at 4%. The 4% support level is a formidable psychological level that has been tested the past few days, but has sent yields higher. This level was also tested around mid September, but held. If Yields can break beneath 4%, it would be a strong signal that they will likely head to the next stop, which is 3.91%. We must remain on guard, as yields do have a lot of room to the upside before the 25-day Moving Average, which is at 4.10%.