Good Thursday AM,

What a week for bonds (and stocks).

Equities hit all-time highs yesterday on a very dovish announcement, dot plot and talk from Chairman Powell. Clearly the focus has shifted from get inflation under control at all costs to, well inflation is clearly moving down so now we need to focus on stopping any recession. The Fed is currently forecasting 3 rate cuts in 2024 and I expect that will increase.

Here is a brief recap of yesterday’s market events:

First, the PPI came in on the cool side. And more importantly, the components of PPI that plug into PCE — the Fed’s preferred inflation gauge — imply a very cool reading ahead. In a note to clients, Citi estimated that the forthcoming core PCE reading will come in at just 0.46% for the month. So stocks rallied after that.

Then at 2pm we got the Fed announcement, which indicated an expectation of 75 bps worth of rate cuts in 2024. Core PCE is forecasted to grow by 2.4% now next year vs. previous expectations of 2.6%.

And then during the Powell press conference, it was basically dovish all the way through. He didn’t express concern about easing financial conditions. And he didn’t express concern about the economy possibly growing at “above trend” rates. (He also said there’s no reason to believe we’re in a recession right now).

Today’s data was not bond friendly.

Much higher retail sales than expected and lower unemployment claims. It is clearly all about the holidays (shopping and temp employees) but none the less, the data was hotter than markets expected. It doesn’t matter at the moment for bonds though. The euphoria from Mr. Powell continues and the 10yr note is down to 3.90%, a full 100 basis points below where we were just a month ago. You are seeing that in rate sheets!

Tough to not lock with rates clearly much lower however, with the next Fed meeting at the end of January, I don’t think much will derail this train for the next few weeks. I would expect we have seen the lion share of the improvement for the time being and keep in mind that rates will not be reflective of all of the improvement as servicers do not want to have early pay offs (they are a comin’)…

Please remain safe and healthy, Happy Holidays, Make today great!