Markets expect moderate volatility later in the week

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Published Date 12/18/2023

Rates began unchanged this morning with no driving news. This week has a few key data points later this week. Inflation with November PCE (personal consumption expenditures), consumer measurements, both the Conference Board’s confidence index and University of Michigan consumer sentiment.

Last week J Powell set the rate markets on fire with his very dovish outlook for interest rates, the 10 year note declined 33 bps, the 2 year -30 bps, MBS prices increased 70 bps. Some Fed official’s kind of panicked about how markets took his remarks. NY Fed’s President Williams saying that interest rates are “at the right place” to get inflation under control. He commented that it is “premature” to discuss rate cuts as soon as March. “If we get the progress I am hoping to see on inflation and the economy, then of course it will be kind of natural to move monetary policy over a period of a few years to a more normal level,” he said. Fed governor Waller also waded in trying to soften how markets reacted to Powell. And more over the weekend. Chicago Fed President Goolsbee (2023 FOMC voter) has noted that it is too early to declare victory on inflation, according to Bloomberg, and Cleveland Fed President Mester (2024 voter) told FT that the market is a little bit ahead of the Fed's rate-cut view.

Doesn’t matter to markets that the Fed continues to throw out roses only to be yanked back by Fed officials responsible for trying to cool the enthusiasm. Markets are pricing 66% odds that a first interest-rate cut by the Fed will happen in March, or two meetings from now, according to the CME’s FedWatch. Bank of America, for example, now expects cuts totaling 100 basis points next year, up from 75 bp previously. Data indicate the U.S. “can enjoy both modest growth and disinflation. Simultaneously.”

At 9:30 am the DJIA opened +43, NASDAQ +24, S&P +14. 10 year note at 9:30 am 3.96% +5 bps. FNMA 6.0 30 year coupon at 9:30 am -5 bps from Friday’s close and -3 bps from 9:30 am Friday.

At 10 am December NAHB housing market index was expected at 36 from 34 in November; the index increased to 37.

The 10 year note as well as stocks very over extended. Any back up in rates should not be seen as the end of rate declines, markets now need to assess and regroup. Inflation data on Friday.

This Week’s Economic Calendar:

Monday,

10 am December NAHB housing market index (36, as reported 37)

Tuesday,

8:30 am November housing starts and permits (starts 1.360 million from 1.372 million; permits 1.470 million from 1.487 million)

Wednesday,

7 am weekly MBA mortgage applications

10 am Q3 current account balance $-203B

December consumer confidence index (103.4 from 102.0)

November existing home sales (3.775 million from 3.79 million)

Thursday,

8:30 am weekly jobless claims (210K from 202K)

Q3 final GDP (+5.2%, personal consumption expenditures 3.6%; both unchanged from the prelim last month)

Dec Philly Fed business index (-3.0)

Friday,

8:30 am November PCE (month/month +0.4% from +0.2%, year/year +2.9% from 3.0%; core PCE month/month +0.2% unch from October, year/year 3.4% from 3.5%)

Personal income +0.4%, spending +0.3%)

November durable goods orders (+2.4% from -5.4%, ex transportation +0.2% from 0.0%, core capital goods +0.1% from -0.3%)

10 am Final University of Michigan consumer sentiment index (69.4, year ahead inflation 3.1%)

Source: TBWS

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