Stocks are lower and Mortgage Bonds are higher so far this morning. There was a Thanksgiving buffet of economic data released this morning, all of which was weaker and Bond friendly.
San Francisco Fed President and non-voting member, Mary Daly, said that she supports cutting rates on December 10 because of the sudden deterioration in the labor market. She also said that an inflation breakout is a lower risk. There has been a shift at the Fed, ever since NY Fed President Williams’ comments, where there is now more support for a cut on December 10.
After the latest weekly ADP Employment Report, it’s hard to imagine that other Fed members will be able to fight the feeling of a souring labor market.
ADP Weekly Employment Data
ADP released their weekly job insights report showing that on average, there were 13,500 job losses each week in the four weeks ending November 8. This was even weaker than the previous report released last week, which was revised lower from 2,500 job losses each week to 7,500 job losses.
Clearly, the ADP report is showing a lot of weakness in the labor market…yet Nela Richardson from ADP said that while hiring momentum is slower than what they expect at this time of year, the overall jobs market is still OK. She pointed to low Initial Jobless Claims and the Unemployment Rate still being historically low, giving the labor market a grade of B- or C+. She fails to look at continuing claims within the same report, and while the unemployment rate is still low historically speaking, it has gone up each of the last three months and is much higher than where it was at 3.4% in 2023. We have no idea what she is looking at when giving her grade, because this looks more like a D or D-.
After the ADP report, the odds of rate cut on December 10 increased to 85%. This is clearly a volatile figure, but becomes more accurate the closer it gets to the actual Fed meeting. Let’s see what happens next week.
Producer Price Index
The Producer Price Index (PPI), which measures wholesale inflation, showed that headline inflation rose 0.3% in September, which was right in line with estimates. Year over year, headline inflation rose 2.7%, which was also in line with estimates and the same as August after it was revised higher by one tenth.
Gasoline prices rose 11.8%, which was the main reason the headline rose 0.3%.
Core PPI, which strips out food and energy prices, rose 0.1% in September, which was cooler than the 0.2% expected. Year over year, Core PPI decreased from 2.8% to 2.6%, which was cooler than estimates of 2.7%.
The PPI has a 12% influence on the Personal Consumption Expenditures report, which is the Fed’s favorite measure of inflation. The shared components were well behaved in aggregate, so from that piece of the puzzle, it should lead to a tamer PCE report.
Retail Sales
Retail Sales for September, which gives a read on the health of consumer spending, rose 0.2%, which was half of estimates of 0.4%.
Core Retail Sales, which is most important and is plugged into GDP, fell 0.1%, which was much weaker than the 0.3% rise expected.
If this trend continues, and the consumer continues to show weakness, it could lead to a slower overall economy with weaker inflation and labor figures.
Case-Shiller & FHFA Appreciation Reports
The Case-Shiller Home Price Index, which is the “gold standard” for appreciation, showed that home prices rose 0.2% in September on a seasonally adjusted basis. The raw figure showed that home prices fell 0.3%. This is the second month in a row where there have been home price gains on a seasonally adjusted basis, which is a nice shift from five months in a row of declines prior. This is likely reflecting some more activity since rates fell in September.
Year over year, home prices rose 1.3%, which is a moderation from 1.4% in the previous report.
The FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Different than Case-Shiller, it does not include cash buyers or jumbo loans. The FHFA reported that home prices were flat in September after seasonal adjustments. Year over year, FHFA is showing that home prices are up 1.7% year over year, down from 2.4%.
Delayed Data Releases
PCE for September will now be released on December 5. October and November will both be rescheduled.
Q3 GDP Advanced reading will be released on December 23. The preliminary release will be skipped, and the final will be rescheduled.
Technical Analysis
Mortgage Bonds are testing overhead resistance at 101.17, which is a level that stopped prices from moving higher in late October and early November. Bonds were above the aforementioned level in the early going, but it appears to be holding for now. If Bonds can convincingly break above 101.17, there is 27bp of room to the upside until the next level of resistance. We feel Bonds will get there, especially with the weaker data of late and momentum being on our side according to the Stochastic chart.
The 10-year has moved down to our target of 4%, which is an important technical and psychological level. If yields can get under 4%, the next stop is 3.95%.
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