All Things in Moderation

Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up small.

House prices rose 0.6% in September, according to the FHFA House Price Index. On an annualized basis, they grew 5.5%. “U.S. house price growth continued to accelerate in the third quarter, appreciating more than in each of the previous four quarters,” said Dr. Anju Vajja, Principal Associate Director in FHFA’s Division of Research and Statistics. “House prices rose in the third quarter in all census divisions and are higher than one year ago, driven primarily by a low supply of homes for sale.”

Applying the 5.5% (actually 5.45%) increase gives us an expected conforming loan limit for 2024 of $765,800. FHFA should make the official announcement in the next week or so.

Home prices rose 2.5 MOM, according to the Case-Shiller Home Price Index, setting a new record. “On a year-to-date basis, the National Composite has risen 6.1%, which is well above the median full calendar year increase in more than 35 years of data. Although this year’s increase in mortgage rates has surely suppressed the quantity of homes sold, the relative shortage of inventory for sale has been a solid support for prices. Unless higher rates or exogenous events lead to general economic weakness, the breadth and strength of this month’s report are consistent with an optimistic view of future results.”

The rally in the bond market has caused the yield curve to steepen its inversion. The 10 year minus the 3 month is -110 basis points, which is less inverted than last spring, but it is a signal that the soft landing / no landing narrative of early fall is fading.

We are starting to see some more casualties in the real estate space. Unicorn real estate company Veev, a maker of modular homes, is reportedly closing up shop. The company had raised $600 million in total, but was unable to raise any more and cannot service the current debt nor can it move the merchandise.

Consumer confidence improved in November, according to the Conference Board. “Assessments of the present situation ticked down in November, driven by less optimistic views on current job availability, which outweighed slightly improved views on the state of business conditions. More consumers said that business conditions were ‘good’ compared to last month, but more also said they were ‘bad.’ Regarding the employment situation, more consumers said that jobs were ‘plentiful’ compared to October, but the number saying jobs were ‘hard to get’ also increased. By contrast, when asked to assess their current family financial conditions (a measure not included in calculating the Present Situation Index), the share reporting ‘good’ rose, and those citing ‘bad’ fell, suggesting consumer finances remain healthy heading into the holiday season.”

Inflationary expectations ticked down from 5.9% to 5.7%, which is a lot higher than U-Mich and breakeven inflation rates in the TIPS market.

There has been a lot of chatter about what to make of the big decline in median new home prices. The median new home price fell 18% compared to a year ago. Does this mean that homebuilders are cutting prices to move the merchandise? And if so, does this portend a big decline in home prices overall?

First of all, median home prices are not necessarily comparable on a year-over-year basis. If a builder sells a bunch of McMansions in one year, and then sells a bunch of starter homes in the next year, the median price is going to fall, but that is due to a change in the product mix, not necessarily market weakness.

There were 439,000 new homes for sale at the end of October, which represents 7.8 months worth of inventory. Historically, 7.8 months represents an oversupplied market, but the overall supply / demand balance in the US is skewed towards undersupply, not oversupply.

The wild card is prices are falling in the previously hot West Coast and Sun Belt markets, and there probably is some localized price cutting happening. Think places like Phoenix, Las Vegas, Austin. That said, if builders were aggressively cutting prices, it would show up in lower gross margins, and that isn’t happening.

So do I think the decline in median new home prices signals overall home price weakness going forward? No.

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Vital Statistics:

Stocks are flat this morning on no real news. Bonds and MBS are down.

Markets will close early today, and liquidity should be sparse.

European Central Bank President Christine Lagarde said the ECB can take a pause and observe. “We have already done a lot,” Lagarde said. “Given the amount of ammunition we have used, we can observe very attentively the components of our lives like salaries, profits, like fiscal, like geopolitical developments and certainly the way in which our ammunition is impacting our economic life to decide how long we have to stay there and what decision we have to make”

The national mortgage delinquency rate fell 3 basis points to 3.26%, according to the Black Knight Mortgage Monitor. Active foreclosure inventory rose to 217k, which is well below pre-pandemic levels. Prepays fell to 0.43%.

More evidence that the economy is slowing: The S&P Flash PMI showed the economy barely expanding, with employment falling. US companies cut workers for the first time since June 2020.

“The US private sector remained in expansionary territory in November, as firms signalled another marginal rise in business activity. Moreover, demand conditions – largely driven by the service sector – improved as new orders returned to growth for the first time in four months. The upturn was historically subdued, however, amid challenges securing orders as customers remained
concerned about global economic uncertainty, muted demand and high interest rates. Business uncertainty was also heightened among US firms, as expectations regarding the year-ahead outlook slipped to the weakest since July.

“Businesses cut employment for the first time in almost three-and a-half years in response to concerns about the outlook. Job shedding has spread beyond the manufacturing sector, as services firms signalled a renewed drop in staff in November as cost savings were sought.

“On a more positive note, input price inflation softened again, with cost burdens rising at the slowest rate in over three years. The impact of hikes in oil prices appear to be dissipating in the manufacturing sector, where the rate of cost inflation slowed notably. Although ticking up slightly, selling price inflation remained subdued relative to the average over the last three years and was consistent with a rate of increase close to the Fed’s 2% target.”

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Vital Statistics:

Stocks are higher this morning after good numbers out of Nvidia. Bonds and MBS are flat.

The FOMC minutes showed that the Fed is not considering rate cuts. “Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee’s goals had become more two sided. But with inflation still well above the Committee’slonger-run goal and the labor market remaining tight, most participants continued to see upside risks to inflation.” Note that this meeting took place before the weak CPI number which showed Fed progress on inflation.

The minutes did mention the problems in commercial real estate, which are going to impact bank earnings as provisions for credit losses increase. A lot of CRE loans need to be rolled over next year and many of these projects cannot be refinanced unless LPs put up more capital. If the LPs refuse, the real estate goes to the banks.

Mortgage applications rose 3% last week as purchases increased 4% and refis rose 2%. “U.S. bond yields continued to move lower as incoming data signaled a softer economy and more signs of cooling inflation. Most mortgage rates in our survey decreased, with the 30-year fixed mortgage rate decreasing to 7.41 percent, the lowest rate in two months,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Mortgage applications increased to their highest level in six weeks, but remain at very low levels. Purchase applications were up almost four percent over the week, on a seasonally adjusted basis, as both conventional and government purchase loans saw increases. The average loan size on a purchase application was $403,600, the lowest since January 2023. This is consistent with other sources of home sales data showing a gradually increasing first-time homebuyer share.”

Consumer sentiment fell in November, according to the University of Michigan Consumer Sentiment Survey. Expectations about future conditions remain dour. Unfortunately, consumer expectations for inflation rose again, with consumers seeing year-ahead inflation coming in at 4.5%, which was the highest since April. Long-run expectations rose to 3.2%, the highest since 2011. We know the Fed pays close attention to the inflationary expectations number.

Durable goods orders fell 5.4% in October, according to the Census Bureau. Transportation drove the decrease. If you strip out transportation, durable goods orders were flat. Capital goods orders (a proxy for business capital expenditures) fell 0.1%. All of the durable goods numbers came in below expectations. Separately, Initial Jobless Claims fell to 209k.

Filed under: Economy | 19 Comments »

Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are up.

Housing starts rose 1.9% MOM to a seasonally adjusted annual rate of 1.37 million. This was still down 4.2% on a YOY basis. Building Permits rose 1.1% MOM to 1.49 million. The mix of housing starts continues to shift from multi-family to single family. There is a glut of apartments under construction and multifamily commercial real estate is becoming an issue.

The National Association of Realtors reports that listings are increasing as mortgage rates fall. The rate “lock-in” effect, which basically says that people are unwilling to move when that means trading a 3.5% mortgage for a 8% mortgage, appears to be easing. Median listing prices are holding up, although it sounds like some of the Western markets which rocketed during the pandemic are seeing a lot of price cuts without homes moving.

NAR Chief Economist Lawrence Yun forecasts that existing home sales will rise 15% in 2024 as mortgage rates fall into the 6% – 7% range by the Spring Selling Season. Based on normal MBS spreads, a 4.4% 10-year should translate into a 6.4% mortgage rate. “The 10-year Treasury yield is at 4.4%, which historically means mortgage rates could be at 6.4%, but they are much higher,” said Yun. “The bond market is forcing the Fed to pivot.”

Ultimately the rate lock-in effect will dissipate as real life intrudes. “Pent-up sellers cannot wait any longer. People will begin to say, ‘life goes on,'” said Yun. “Listings will steadily show up, and new home sales will continue to do well. Existing home sales will rise by 15% next year.”

The Wall Street Journal has a piece this morning on how foreign demand for Treasuries has dissipated. Much of it has to do with foreigners selling Treasuries in order to prop up their own currencies (China in particular). However, there was an interesting note in the piece: China is swapping out its Treasuries for MBS.

“At the same time, China has diversified reserves away from Treasurys and has been investing in bonds backed by U.S. government agencies such as Freddie Mac that offer higher yields than Treasurys. China has bought a net $32 billion of those in the year through August, according to data from the Council on Foreign Relations. “

If this catches on, increased appetite for agency debt, along with a decline in bond market volatility could be the catalyst for decreasing MBS spreads, at long last.

Personal interest payments continue to rise. Hard to see how consumer spending can be sustained in the context of this, especially as the COVID payment suspensions go away.

Interestingly WalMart’s CEO warned of deflation on the earnings conference call yesterday. Haven’t heard that word bandied about in a while – deflation is generally a credit event, not a monetary one – but if retailers are cutting prices to move excess inventory that should be a good sign for inflation.

Filed under: Economy | 16 Comments »

Vital Statistics:

Stocks are flat this morning as retailer earnings come in. Bonds and MBS are up.

Industrial production fell 0.6% in October, according to the Federal Reserve. Manufacturing production fell 0.7%. Capacity Utilization fell to 78.9% which is well below its long-term average. This confirms the readings we have been getting out of the ISM surveys – manufacturing is struggling. Separately, the employment market seems to be weakening as initial jobless claims rose to 231k last week.

Hot on the heels of cautious guidance out of Home Depot and Target, Wal Mart sounds the alarm on consumer spending. The CFO said in an interview on CNBC that Wal Mart has been “leaning heavily into promotions,” which should be taken to mean “cutting prices to move the merchandise.” “Our events have been strong,” he said. We’ve been pleased with those. Halloween was good overall. But in the in the last couple of weeks of October, there were certainly some trends in the business that made us pause and kind of rethink the health of the consumer.” Comp sales were strong at 4.9%, but if the consumer is struggling you should expect to see better results out of the discounters and the dollar stores.

There is lots of talk about a soft landing (Google it), and certainly most everyone will prefer that to a hard landing. That said, it is usually a negative sign.

Now lets look at how much the Fed Funds rate increased before these mentions: 1995: 345 basis points, 2000:285 basis points, 2006: 440 basis points, 2018: 243 basis points, 2023: 525 basis points. I know a soft landing is the base case for the government and the big investment banks, but it feels like drawing into an inside straight right now.

What does that mean for rates? They should be going down, but the US has a lot of debt maturing over the next year that needs to be rolled over. And China isn’t buying:

The third quarter was tough for independent mortgage banks according to research from the MBA. Independent mortgage banks lost an average of $1,015 per loan, an increase from the $534 loss in the second quarter. “Net production income has been in the red for six consecutive quarters. MBA forecasts lower industry volume over the next two quarters compared to last quarter, which means a turnaround is unlikely until the second quarter of 2024. One silver lining is that mortgage servicing continues to be a bright spot for many companies. Combining both the production and servicing business lines, roughly half of mortgage companies stayed profitable in the third quarter of 2023. Were it not for mortgage servicing, only about one in three companies would have been profitable.”

Homebuilder sentiment fell in November as rising interest rates dampened affordability.

“The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Moreover, higher short-term interest rates have increased the cost of financing for home builders and land developers, adding another headwind for housing supply in a market low on resale inventory. While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and home building, thereby allowing more attainable housing supply to the market.”

“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” said NAHB Chief Economist Robert Dietz. “In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%. Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and likely set the stage for improved builder views of market conditions in December.”

Mortgage credit availability improved in October, according to the MBA. “Mortgage credit availability rose in October, but the growth was driven by increased activity in the jumbo market. The jumbo index increased by 2.7 percent to the highest level in 14 months – its third straight monthly increase. However, despite the uptick in credit availability recently, we are still close to the lowest levels since 2013. Loan offerings remain narrower as lenders have reduced capacity to cope with the lower origination volumes,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Some lenders responded to the challenging rate environment and offered more ARM products, as mortgage rates increased by over 40 basis points on average in October, reaching almost 8 percent in the second half of the month.”

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Vital Statistics:

Stocks are higher after a weaker-than-expected CPI print. Bonds and MBS are up big.

Inflation was flat month-over-month in October, according to the Bureau of Labor Statistics. The number was driven by an increase in shelter, which was offset by a decline in gasoline. On a year-over-year basis inflation rose 3.2%.

If you strip out food and energy, inflation rose 0.2% month-over-month and 4% year-over-year. Both the headline and the core inflation rates came in below expectations, which drove a big decrease in the 10 year yield, taking it down to the lowest level since late September.

This print, along with the weaker-than-expected jobs report shows that the Fed’s tightening policies are having the desired effect. With UBS introducing a call for 275 basis points in easing next year, the discussion over Fed policy is now starting to consider the possibility that the Fed has over-shot. Given that 525 basis points in rate hikes over 18 months is one of the most aggressive tightening cycles on record, it does need to be part of the conversation.

The Fed Funds futures have taken any further rate hikes off the table. They are forecasting no change at the December and June meetings, and a 28% chance of a cut at the March meeting.

Small Business Optimism declined in October, according to the NFIB. Business is seeing weakened demand, with a net negative 17% of business owner reporting lower sales over the past 3 months. This is down dramatically from September and is the lowest reading since July 2020. Despite the drop in demand, inflation remains the single biggest concern, with a net 30% of small businesses raising prices.

In the commentary, the NFIB discusses how we could have such low sentiment when GDP grew at 4.9% in the third quarter. The first explanation is that the growth rate will be revised downward. That is a possibility. However if you look at the components of GDP growth a lot came from inventory build. Inventory buildup is generally what causes recessions in the first place, as companies cut production in order to move the merchandise which triggers layoffs. Given the data about sales and inventory build the fourth quarter is looking to be weak.

The economy has also been supported by government spending, which is often called “junk GDP” since it is largely artificial and doesn’t represent real, sustainable demand.

Filed under: Economy | 18 Comments »

Vital Statistics:

Stocks are lower this morning after Moody’s downgraded the US outlook from stable to negative after the market closed on Friday. Bonds and MBS are down small.

Moody’s downgraded their outlook for the US on Friday from “stable” to “negative,” citing the mounting debt and the rising cost of servicing that debt. “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues,” the agency said. “Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”

The US will have to pass another stopgap measure once we hit the debt ceiling later this week. Given that bond prices are roughly where they were prior to the announcement, the markets appear to be taking this in stride.

The week ahead will have the Consumer Price Index on Tuesday, along with retail sales and housing starts. We will also get a lot of Fed-speak.

UBS is out with a call saying the Fed will cut the Fed Funds rate by 275 basis points next year. Morgan Stanley sees the first rate cut in June, while Goldman sees Q4.

Mortgage delinquencies increased in the third quarter, according to the MBA. “The national mortgage delinquency rate increased in the third quarter from the record survey low reached in the second quarter of this year, with an uptick in delinquencies across all loan types – conventional, FHA, and VA,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “The increase was driven entirely by a rise in earliest-stage delinquencies – those 30-days and 60-days past due. Later-stage delinquencies – those 90 days or more past due – declined to the lowest level since the first quarter of 2020. The decline in later-stage delinquencies, along with a foreclosure starts rate of 0.14 percent – which is well below the historical quarterly average of 0.40 percent – suggest that distressed homeowners may be utilizing available loss mitigation options that prevent a foreclosure start. Additionally, accumulated home equity may also be enabling some homeowners to sell their homes well before foreclosure becomes a possibility.”

The problems in commercial real estate are coming to a head as the problems in office expand to retail and multi-family. I discussed the state of play in my latest Substack post – please check it out and consider subscribing.

The Wall Street Journal had a story this morning (paywall) about the problems in mezzanine debt, which is like a second mortgage for commercial real estate properties. Foreclosures hit a record this year in the mezzanine space, which is often a canary in the coal mine. It looks like a lot of the creditors are not banks, but hedge funds and asset managers. But with asset prices in free fall, the banks will start to feel the heat.

The problems in commercial real estate might be one reason why the Fed will need to ease sooner rather than later.

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Vital Statistics:

Stocks are higher despite some hawkish comments out of Jerome Powell yesterday. Bonds and MBS are up.

Bonds got hit yesterday on a lousy 30-year auction and hawkish comments out of Jerome Powell. At an IMF conference, Powell said:

“The Federal Open Market Committee (FOMC) is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance. We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so. We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening. We are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks, determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time. We will keep at it until the job is done.”

The 30 year auction at a -5.3 basis point tail, the highest on record. Primary dealers bought nearly a quarter of the issue (double normal) as foreign demand evaporated.

Consumer sentiment fell for the fourth straight month, according to the University of Michigan Consumer Sentiment Survey. We saw a divergence in sentiment amongst income groups, with higher income groups improving based on asset prices, while lower income groups are getting hit by inflation.

Importantly, the year-ahead inflationary expectations ticked up from 4.2% to 4.4%, indicating that the big jump in October (from 3.2% to 4.2%) was not just an outlier. Long-run expectations increased as well to the highest since 2011. Blame high gasoline prices on the increase.

On this Veteran’s Day, I want to share a sea story.

I was on the USS Gridley (CG-21) in the Persian Gulf at the end of Desert Storm (early 92). The combat part was over, but we still kept a Tomahawk shooter in the Northern Persian Gulf. The job of the USS Gridley was to defend the Tomahawk shooter (typically a Spruance class destroyer) from air attack.

Anyway, defending a Spruance destroyer is a pretty boring job. We were assigned a 8 nautical mile box and would lazily steam back and forth in it, all while dodging fishing boats, oil rigs, and tankers. One morning, the Middle East commander ordered us to investigate a distress signal in the Arabian Sea. We left the Northern Persian Gulf and headed through the Straits of Hormuz.

We eventually found the ship that made the call. It was a Somali cargo ship with a ton of people on it. We couldn’t communicate with the ship, so we sent a couple of engineers in a small boat to take a look at it and see if they could fix it. The seas were really rough, and doing loops around the ship while we waited for the verdict from the engineers was a pain. The engineers reported back that the diesel engine had somehow lost its oil and it was ruined, like cylinder-lining-in-the-sump. Unfixable. We reported back to the ME Commander who ordered us to tow the thing back to Somalia.

To pass a rope between ships, you fire a shot line (basically an orange bobbin with strong thread) from a rifle, then attach a 1 inch rope to that (called the messenger line) and then attach the towline (which is 5 inches in diameter and heavy as hell). The towline does the work. We pass by the ship, and our guy on deck pulls out the rifle and shoots the line over. Everyone on the deck of the Somali ship watches the orange bobbin fly over their heads. Then they look back at us with a “What the hell are you weird Americans doing?” look on their faces. We yell back “PULL! PULL!” They don’t speak English and they don’t get that they are supposed to pull on the orange line. By this time, the orange line has slipped off the Somali ship and we had to make another pass. Remember, these are ships, not Ferraris and getting close for a loop around in rough seas takes a while.

So this time, we pass by slowly, shoot the line over, and pantomime pulling. Luckily the light bulb goes off on the other ship and they start pulling on the shot line. They pull the shot line up, grab the 1 inch messenger line and tie it to the bow and signal they are ready to go. They don’t realize there is another rope tied to the 1 inch rope. Towing a 8,000 ton ship with a 1 inch line is like towing a car with twine. We pantomime pulling again. They don’t get it. We finally get them on the radio. We pass the word on the ship for anyone with foreign language skills to report to the bridge. That covered Spanish and Tagalog. No dice. We call up the intel weenies. Get an Arabic speaker, but the Somalis don’t understand.

We finally gave up and towed the ship with the messenger line. We go slowly (like 1.5 knots) and take them back to Mogadishu. It took us forever to get back. When we finally got them to port, we asked the Port Manager where he wanted these guys. He didn’t want them and told us to take the ship somewhere else. We didn’t want a diplomatic incident, so we called up the Commander of the Middle East and told him the story. We were told to just leave them anyway. We told Mogadishu ”the Adele II is your headache now.” The Adele II dropped anchor, and we headed back to the Persian Gulf.

In our wrap-up report to the Commander Middle East, we included a “lesson learned” – translate “Heave Around” in every known language.

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Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are up.

Neel Kashkari isn’t convinced rate hikes are over. “Undertightening will not get us back to 2% in a reasonable time,” Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said in an interview with The Wall Street Journal on Monday. He is awaiting further data. “I am not ready to say we are in a good place.” Note that Kashkari has generally favored more aggressive responses to the economy, pushing for lower rates during the ZIRP period and higher rates now.

Chicago Fed President Austan Goolsbee thinks we could be on a “golden path” of lowering inflation without causing a recession. “Because of some of the strangeness of this moment, there is the possibility of the golden path … that we got inflation down without a recession,” Goolsbee said on CNBC’s “Squawk Box.” “If that happened … it would just be a continuation of what we’ve already seen this year, which is unemployment up very modestly, while inflation has come down a lot. … That’s our goal.”

The “strangeness of the moment” is the residual effects of a firehose of fiscal stimulus in 2020-2022. The Fed has never been able to hike rates like this without causing a recession in the past. It is a “this time is different.” take.

Credit standards continue to tighten, according to the Fed’s Senior Loan Officer Survey. “For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than government residential mortgages, for which standards remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Moreover, for credit card, auto, and other consumer loans, standards reportedly tightened, and demand weakened on balance.”

The survey mentioned commercial real estate as a continued pain point.

Mortgage delinquencies picked up in September, according to the Black Knight Mortgage Monitor. The DQ rate increased to 3.29% which was up 12 basis points from August and 13 basis points from a year ago. This was the largest increase in the past 2.5 years. 30 day DQs rose by 5.1% making it the fourth consecutive monthly rise, while 60 day DQs have risen for 6 months in a row. Note DQs are still below pre-pandemic levels, but it looks like rising rates and a weakening labor market are starting to have an effect.

Rocket reported third quarter numbers that beat expectations. Closed loan volume fell 13% YOY to $22.2 billion. Gain on sale margins increased by 10 basis points to 2.79%. Rocket is guiding for a seasonal slowdown in the fourth quarter which is to be expected.

It looks like the Fixed Income Clearing Corporation is greasing the skids to up margin requirements for MBS. The volatility in the bond market is causing them to increase their risk assessments.

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Vital Statistics:

Stocks are higher after the Fed paused at the November meeting. Bonds and MBS are up big. Sovereign yields are down across the board, with big declines in Gilts after the Bank of England maintained rates at current levels. We also are seeing a double-digit drop in Bund yields.

As expected, the Fed maintained the Fed Funds rate at current levels. The statement itself was virtually identical to the September statement. The markets seem to be seizing on this statement from Powell that the Fed is done: “The question we’re asking is: Should we hike more?” Powell told reporters yesterday after the Fed held off on raising interest rates for a second consecutive policy meeting. “Slowing down is giving us, I think, a better sense of how much more we need to do, if we need to do more.”

The December Fed Funds futures now predict only a 15% chance of another 25 basis point hike, a sizeable difference from a month ago, when it was closer to 40%.

Great interview with Chris Whalen on why the Fed has to stop and the problems in the commercial real estate market. His point is that valuations in the commercial real estate market are falling and that is a big problem in a rising interest rate environment.

Productivity rose 4.7% in Q3, which is good news for the Fed as it allows output to increase without pushing up inflation. Unit labor costs fell 0.8%. Manufacturing productivity fell, while services productivity increased by a lot.

Companies announced 36,836 job cuts in October, a 22% decrease from February and a 9% increase from last year. Technology continues to be the leading sector, with financial in the #2 slot. AI is a driver of a lot of these changes. Hiring plans are down 46%. Seasonal hiring plans are the lowest in 10 years.

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