Good Morning on this best day of the week Wednesday, from your Hometown Lender,

No economic data today.

With only a 10-yr note auction (which didn’t go so well) markets are left to their own devices. That tends to mean that the charts dictate movement. After such a huge run to lower rates and a big selloff in stocks, calmer heads are prevailing. Stocks have rebounded a bit, and bonds have leveled out as well. Even with the bounce higher, the 10-yr note is still .625-.75% lower today than it was just 45days ago. The expectation for an emergency Fed meeting is, for the moment, on hold. Not that it won’t happen but this week, with no data to confirm the economy is slowing, the Fed is holding. Next week brings CPI, PPI, Retail sales, Unemployment claims, etc.. and that will drive volatility. I think Bonds are in the first inning of their movement to lower rates. It is never going to be a straight line up or down, and it is better for markets that it isn’t. If prepayment speeds increase more quickly than expected, interest rates will not improve at the same pace that bond yields do.

Why are we in the first inning of lower rates you ask…

Dr. Elliott Eisenberg shared that since 1955, the Fed has unwound 86%, on average, of the prior rate hikes during the ensuing rate easing cycle, which we’re entering. This means the Fed funds rate bottoms out at 0.75%. The smallest historical reversal would suggest that Fed funds hits 2.25%. Yet the market is now expecting a Fed funds rate trough of 3.25%. This means there is probably way more easing to come than we expect.

Last, on the question of a recession…

One indicator that has stood every test is the Sahm rule (modeled by Dr. Claudia Sahm) to predict recessions. She developed/used this rule at the Brookings institute (think tank where Ben Bernanke works) to propose sending out stimulus checks to people ahead of the time they would feel the impact of the recession to help ease the burden.

Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months. We hit this indicator this month.

Stay safe and make today great!