January 27th, 2023 - Market Update
Current position: Carefully floating
Stocks and Mortgage Bonds are both trading near unchanged levels after the Fed's favorite measure of inflation, PCE (Personal Consumption Expenditures), was reported, showing that inflation continues to improve.
PCE (Personal Consumption Expenditures) Inflation Report
The Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that inflation rose 0.1% in December, which was 0.1% hotter than estimates, and fell from 5.5% to 5% on a year over year basis. The year over year decline was as expected.
The core rate, which is the Fed's favorite measure and strips out food and energy prices, rose 0.3% last month and declined from 4.7% to 4.4% year over year. These were also in line with estimates.
While most of the readings today were in line with expectations, we are seeing a meaningful improvement in inflation. Headline PCE has declined 2% from the peak of 7% in June of last year, while the Core rate has declined 1% since the peak of 5.4% in February of last year. We think the Core rate could get under 3% in the June data this year, which we get in July, or the August data, which we get in September.
Looking deeper into the report, personal spending was down 0.2% after November was revised from a positive 0.1% to a negative 0.1%. This shows that the consumer is spending less, which lines up with some of the other reports we have seen of late, and points to a further economic slowdown. We would not be surprised to see GDP come in negative in the first two quarters.
Pending Home Sales
Pending Home Sales, which measures signed contracts on existing homes, rose 2.5% in December. Additionally, November was revised higher from -4% to -2.6%. Looking at the originally reported number from last month, sales are up 4%.
We are starting to see housing sales figures rebound in New Home Sales, Pending Home Sales, and mortgage applications. It's likely the bottom is in for these reports, and as rates continue to move lower, activity will continue to increase.
Sales are now down 33% from last year, which is an improvement from down 38% in the previous report, but still well below last year's levels.
The NAR said, "This recent low point in home sales activity is likely over. Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market."
Next Week
Tuesday
New Appreciation readings for November from the Case Shiller HP and FHFA HPI
Wednesday
Mortgage Apps, ADP Employment Report, JOLTs, Fed Statement/Press Conference
Thursday
Initial Jobless Claims. Job Cuts Report. Jobs Report Strategy
Friday
BI S Jobs Report for January
Technical Analysis
Mortgage Bonds have been trading somewhat sideways since the beginning of the year, trapped in a range between a dual floor of support, formed by the 25 and 50-day Moving Averages, and overhead resistance at the formidable 101.671 Fibonacci level.
This is a 60bp range, so we can see some big price fluctuations while in this range, but the dual floor of support is strong and is roughly 25bp beneath present levels and should protect us to the downside.
Continue carefully floating.
Source: MBS Highway
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