Stocks are lower and Mortgage Bonds are trading near unchanged levels to start the day.
The Supreme Court ruled against the emergency tariffs this morning, but there are other avenues that can be explored to keep them. This is a longer story and will likely drag on for a while, but likely will not end up with the US having to pay back the majority of tariffs. Nonetheless, it must be watched, because if there is less revenue from tariffs it could result in the need for more debt to be issued. For now, Bonds have taken the news in stride.
Personal Consumption Expenditures (PCE)
The Fed’s favorite inflation gauge, PCE, was finally released for December, and it was hotter than market estimates.
The Headline and Core readings both rose 0.4%, one tenth hotter than estimates. Year over year, Headline inflation rose from 2.8% to 2.9% and Core rose from 2.8% to 3%...both one tenth hotter than market expectations.
Looking deeper into the report, one tenth of the rise was due to video streaming services, like Netflix, Disney+, etc., which rose 19.5% in December and contributed roughly 0.1% to the monthly reading. While this will stay in the yearly readings for awhile, we can expect that this will not be contributing on a monthly basis going forward, as this is a one time increase at least for now.
Shelter always plays an important role and rose by 0.3% in December and 3.3% year over year. The yearly reading is still overstating inflation by about 0.4%. We expect this figure to fall and help inflation this year, but it’s been a slow move. We also expect tariff inflation to subside this year as well, which should help.
Looking forward, the January and February replacements from 2025 are 0.31% and 0.45% respectively, which will make it easier to make progress on inflation. We could see Core inflation come down to 2.6% year over year, depending on how shelter and healthcare come in.
The market really looked past this report, likely because it’s old data for December and the January CPI was much better at 2.5% on the Core reading. The weaker GDP report also helped Bonds.
GDP (Q4 First Reading)
The first Q4 GDP reading was released, showing 1.4% annualized growth in the quarter. This was much weaker than the 2.8% expected, but the government shutdown played a big role. Federal government spending dragged down GDP by 1.15%, again due to the shutdown. Without it, the reading would have been closer to estimates, but still a little beneath it.
Real final sales to private domestic purchases, which is a good read on spending, rose by 2.4%, which is pretty good.
Looking at full year 2025, GDP is now on pace for 2.25%, but there are two more revisions to Q4 GDP.
New Home Sales
New Home Sales, which measures signed contracts on new homes, has been a delayed report due to the shutdown. They finally released both November and December today, and it was a very strong report, but you would not know it if you listened to the media breakdown.
November rose 15%, and from that higher number, December fell 1.7%. But the pace in November and December was the best level of sales in almost four years, with December at 745,000.
The median home price in December was reported at $414,400, which is up 4.2% from November and down 2% year over year…but this is the middle-priced home that sold during the month.
There were 472,000 new homes for sale at the end of December, and based on the pace of sales, means the months’ supply was at 7.6 months. But only 123,000 of those homes are completed, and based on that figure, the actual months’ supply is much tighter at 2 months.
News Next Week
Tuesday: ADP Weekly Employment Data, Case-Shiller and FHFA Home Price Appreciation Reports
Wednesday: Mortgage Applications
Thursday: Jobless Claims
Friday: Producer Price Index Inflation Report
Technical Analysis
Mortgage Bonds are little changed and trading in a wide range between support at the 25-day Moving Average and overhead resistance at 100.38. It’s a positive to see Bonds taking the tariff announcement and news in stride thus far.
The 10-year is also trading in a wide range between 4.126% and 4.05%. Yields could be whipsawed in either direction, so we must keep a close eye on intraday trading.
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