Morning Report: The Fed Funds futures signal more hawkishness after the strong jobs report

Vital Statistics:

S&P futures4,120-27.75
Oil (WTI)74.03 0.66
10 year government bond yield 3.61%
30 year fixed rate mortgage 6.07%

Stocks are lower this morning as investors continue to digest the strong jobs report. Bonds and MBS are down.

The week after the jobs report is generally pretty data-light and next week is no exception. We have limited Fed-speak as well, and about the only thing remotely market-moving next week will be consumer sentiment on Friday.

The strong jobs report caused a more hawkish move in the Fed Funds futures. The march meeting is a lock for another 25 basis points, and there is a 73% chance for another 25 in May. Before the jobs report, investors saw a 40% chance of another hike this year. That said, the December futures see rates at the end of the year between 4.75% and 5%, which is 25 basis points higher than here.

The Wall Street Journal has an article about how housing has probably bottomed. We are seeing traffic increase and realtors are getting more calls. A big difference is that mortgage rates are now around 6% versus 7%+ in the fall of 2022. That said, homebuilders are still seeing outsized cancellation rates, and 2023 is expected to be another tough year for the sector.

One of the markets Goldman mentioned as vulnerable to a 2008-style decline was Austin, TX. The median home prices has fallen by 20% since June, but the rise in mortgage rates means that the median income required to buy that home has increased by 27%. Out-of-town buyers drove up prices beyond what the median income could support. We are seeing the same phenomenon in many Western MSAs like Boise, ID.

“The upside is that local first-time homebuyers finally have an opportunity; they’re no longer facing fierce competition from out-of-towners and investors,” Austin Redfin agent Maggie Ruiz said. “The downside is that 6% mortgage rates are still making homes unaffordable for many people. I’m advising buyers to negotiate with sellers on price and terms, consider buying down their mortgage rate and get into the market now if possible. As soon as rates drop, competition will be back.”

“I’m not seeing many local move-up buyers. Most Austin locals who already own their home are staying put because they don’t want to take on a higher mortgage rate,” she continued. “Some are capitalizing on higher home values, selling and relocating out of Texas to somewhere that’s still more affordable.”

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