Good Thursday AM,

More data today leading up to tomorrow’s main event…

Challenger Job Cuts dropped from 45.5K in November down to 34.8K in December. The December ADP Private Payrolls were stronger than expected with 164K new additions versus estimates of 115K. Initial Weekly Jobless Claims were lower (stronger) than expected, 202K versus estimates of 216K. The more closely watched 4 week moving average dropped to 207K. Continuing Claims had a small move from 1.886M to 1.855M, still trending well above 1.8M. On the news, the 10yr note yield pushed back to 4.00% (we need to close below 3.96% to keep the current downward trend alive per the technicals) mortgage bonds are also fading down 18bps on the day.

The debate now is how much lower can we expect interest rates to decline?

The Federal Reserve minutes from the last meeting indicated that it’s still not quite ready to cut rates. The Fed seems to think interest rate cuts are likely in 2024, but it’s not sure when that might happen. Members at that meeting also indicated that they expect three quarter-percentage-point cuts by the end of 2024 (markets still expecting six cuts), noting that inflation concerns have subsided. Are markets ahead of the Fed? Likely so.. that has worked out well recently (last 60 days) but for the previous year and half, it has been a bad trade to bet against the Fed. Mr. Powell has telegraphed the Fed policy in advance and has then followed through for the last two years. He has not always been right, but he has been consistent, and the economy is much closer to a soft landing today than just six months ago. I would not bet against the Fed. As a note, several members at the meeting hedged their bets saying rates might need to stay high if the right conditions don’t come to fruition and that future decisions would depend on “how the economy evolves.”

It is important to mention that the spread between 30-year mortgage rates and the 10 year treasury note has been tightening.

This is one of the reasons rates were much higher than they should have been for the past 18 months. This morning 30-year mortgage rates about 6.67%, last week Freddie said 30 year mortgages were 6.61%. The spread is still far larger than its historical average. But its downward trend is giving mortgage rates an extra push lower; there is little reason to expect the spread back to the recent low at 1.40 bps, but any tightening is a plus.

Inflation is declining, as the Fed and other central banks want.

2.0% inflation level though won’t be easy to achieve if the economy is expected to avoid a recession as is the view today. The shipping issues in the Red Sea if they persist, will add to inflation. The mid-east situation hasn’t roiled markets so far, but tensions are increasing between the US, Israel, and Iran; it isn’t clear how it will all be resolved without increasing fears. The election in November is going to be one or both parties trying to destroy the other with impeachment talks, with Trump’s legal issues, and lest we forget, the massive US debt that must be funded. These issues are all wild cards that can turn thinking around on each key developing event.

Please remain safe and healthy, make today great!