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Starting Off on the Wrong Foot

January 5, 2024

Financial markets started off the new year on the wrong foot, and interest rates inched higher. Let's discuss what happened and look at next week's events.

Fed Minutes Released

On Wednesday, the minutes from the December Fed meeting from two weeks ago were released. Overall, the minutes amplified Fed Chair Jerome Powell's take, "The Fed" is likely done hiking rates and we'll begin cutting this year. And thankfully, the bond market liked it, which halted the spike higher in rates.

However, there was a line in the Minutes that did not grab a lot of attention in the media, but is worth following for us here in the mortgage and housing industry...

"Several participants suggested it would be appropriate to begin discussing technical factors about slowing balance sheet run-off well before such a decision was reached."

This is an important line as some Fed Members are "starting to talk about talking about" how to slow the shrinking of their balance sheet which is filled with Treasury and Mortgage Bonds. What does this mean for mortgage and housing? The Fed would slow the balance sheet run-off by reinvesting the proceeds from returned principal on bonds that have matured as well as refinance and purchase activity. If the Fed is buying bonds, it will attract other buyers. This could help spreads between Treasuries and Mortgage Bonds narrow, which would go a long way to help home loan rates decline further.

Leading Indicator on Labor Market Health

The JOLTS report is a leading indicator on the labor market. It shows how many "help wanted" signs are posted (jobs available) and how many people are quitting their job. In a case of bad news is good news, the readings show less jobs available and quitting at three-year lows. It's bad news economically, but it is exactly what the Fed wants to see to help lower inflation and slow demand - elevate unemployment.

Let's break it down further. People are less likely to quit if they can't find a job and if there are less help wanted signs or jobs available. The next shoe to drop is higher unemployment. Why? First, businesses stop hiring - check. Next, hours get cut and lastly if conditions do not improve, companies lay people off. The good news? Even if inflation ticks back above 4.00% which the Fed is forecasting, that would still be a historically low unemployment rate and great driver of housing.

Looking ahead

Next week the Treasury will auction off more bonds, which could generate market excitement. The main economic report is the December Consumer Price Index (CPI), a reading on consumer inflation. If this report meets or falls beneath expectations, it would ensure the rate hike back in July was indeed the last.

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