Morning Report: The Fed signals that rate hikes are done.

Posted on December 14, 2023 by Brent Nyitray

Vital Statistics:

We have green on the screen as investors rejoice over the FOMC statement. Bonds and MBS are up.

As expected, the Fed maintained interest rates at current levels, and signaled the tightening cycle is finished. Bonds and MBS are up, with the 10 year bond yield trading below 4%.

As expected, the Fed maintained the Fed Funds rate at current levels, and pointed out that the economy is slowing:

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks

The dot plot showed the Fed expects the 2024 Fed Funds rate to be in a range of 4.5% – 4.75%, which is a sizeable drop from the September forecast of 5% – 5.25%. Note that 2025 and 2026 have been revised lower as well.

2024 GDP forecasts were trimmed from 1.5% to 1.4%, while the unemployment rate is expected to remain at 4.1%. PCE inflation estimates were lowered a hair to 2.4% on both the headline and the core rate.

The reaction in the bond market was dramatic, with the 10 year bond yield falling 15 basis points on the day and the 2 year falling 25 bps. The stock market also took off as investors bet on a soft landing.

The press conference more or less re-iterated the info from the statement, however Powell did signal that this tightening cycle is over:

While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.

When asked about why the Fed is stopping before inflation hits 2%, Powell said that waiting for inflation to hit the target before easing would mean overshooting.

The Fed Funds futures became even more dovish, with the central tendency predicting six rate cuts in 2024. Check out the difference in probabilities between yesterday and a month ago. Amazing.

This statement should be good news for the mortgage space overall, as it will be supportive for MBS spreads. Volatility in the bond market should dissipate as uncertainty over Fed policy ends. The big agency mortgage REITs spiked 5% on the Fed announcement. Mortgage originators also rose, with Rocket rising 9.5% and United Wholesale rising 7.5%. Interestingly, Mr Cooper (which is a big MSR play) only rose 2.4%.

Bottom line: 2024 might be a bit better for the mortgage space than people thought a couple months ago. I suspect the MBA will be taking up estimates for 2024 soon.

In other economic news, retail sales rose 0.3% month-over-month topping expectations, while initial jobless claims fell to 202k. Cue the chorus calling for a Goldilocks-esque soft landing.

Filed under: Economy |

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46 Responses

  1. Let the mutherfuker burn!'s avatar
    Let the mutherfuker burn!, on December 14, 2023 at 6:36 pm said:

    I can’t decide which is worse, that this story is true or that it’s made up to deflect blame.

    https://x.com/mrbartlettnh/status/1735335466927301047?s=46&t=vSGsUlnc4rLxcUf7zfUiHg

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    • Brent Nyitray's avatar
      Brent Nyitray, on December 14, 2023 at 9:21 pm said:

      That was an interesting article, but it tells me nothing is going to change. The Gramscian March Through The Institutions is complete on the media side. Game Over.

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    • ScottC's avatar
      ScottC, on December 15, 2023 at 6:37 am said:

      jnc:

      I especially liked the acknowledgement of what most reasonable people have known for a long time: that the Times is straight up and knowingly lying when it labels opinion pieces “news”.

      The Times newsroom had added more cultural critics, and, as Baquet noted, they were free to opine about politics. Departments across the Times newsroom had also begun appointing their own “columnists”, without stipulating any rules that might distinguish them from columnists in Opinion. It became a running joke. Every few months, some poor editor in the newsroom or Opinion would be tasked with writing up guidelines that would distinguish the newsroom’s opinion journalists from those of Opinion, and every time they would ultimately throw up their hands.

      I remember how shaken A.G. Sulzberger was one day when he was cornered by a cultural critic who had got wind that such guardrails might be put in place. The critic insisted he was an opinion writer, just like anyone in the Opinion department, and he would not be reined in. He wasn’t.

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    • jnc4p's avatar
      jnc4p, on December 15, 2023 at 1:59 pm said:

      Scott, this is what I found telling:

      “As he asserts the independence of Times journalism, Sulzberger is finding it necessary to reach back several years to another piece I chose to run, for proof that the Times remains willing to publish views that might offend its staff. “We’ve published a column by the head of the part of the Taliban that kidnapped one of our own journalists,” he told the New Yorker. He is missing the real lesson of that piece, as well.

      That op-ed was a tough editorial call. It troubles my conscience as publishing Tom Cotton never has. But the reason is not that the writer, Sirajuddin Haqqani, the deputy leader of the Taliban, kidnapped a Times reporter (David Rohde, now of NBC, with whom I covered the Israeli siege of Jenin on the West Bank 20 years ago; he would never be afraid of an op-ed). The case against that piece is that Haqqani, who remains on the FBI’s most-wanted terrorist list, may have killed Americans. It’s puzzling: in what moral universe can it be a point of pride to publish a piece by an enemy who may have American blood on his hands, and a matter of shame to publish a piece by an American senator arguing for American troops to protect Americans?

      As Mitch McConnell, then the majority leader, said on the Senate floor about the Times’s panic over the Cotton op-ed, listing some other debatable op-ed choices, “Vladimir Putin? No problem. Iranian propaganda? Sure. But nothing, nothing could have prepared them for 800 words from the junior senator from Arkansas.” The Times’s staff members are not often troubled by obnoxious views when they are held by foreigners. This is an important reason the paper’s foreign coverage, at least of some regions, remains exceptional. It is relatively safe from internal censure. Less than four months after I was pushed out, my former department published a shocking op-ed praising China’s military crackdown on protesters in Hong Kong. I would not have published that essay, which, unlike Cotton’s op-ed, actually did celebrate crushing democratic protest. But there was no internal uproar.”

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  5. jnc4p's avatar
    jnc4p, on December 15, 2023 at 2:14 pm said:

    And Vox makes another concession, and in the process validates Abbott & DeSantis (et al) tactics:

    “The pressure rose in 2022 and 2023, when Democratic politicians in blue states and cities seeing an influx of migrants increasingly complained that they were overwhelmed — with their shelter systems, schools, and budgets being seriously strained with the challenge of helping so many needy people. Essentially, this meant conceding that a longtime Republican argument — that it’s actually disruptive, difficult, and expensive to deal with a huge inflow of migrants to your area — was correct. New York City Mayor Eric Adams led the backlash, and others joined too.

    “When it was just Republicans complaining, they could ignore them. They could say they were just being partisan, or racist,” a former Biden administration official told the New Yorker earlier this year. “When the Democrats started complaining, they had to listen.””

    https://www.vox.com/2023/12/14/23981077/immigration-deal-biden-senate-asylum-ukraine

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  6. jnc4p's avatar
    jnc4p, on December 15, 2023 at 2:47 pm said:

    Brent, this is good:

    “‘It’s A Great Time To Buy A House,’ Says Realtor Who Gets Paid If You Buy A House
    Economy · Dec 15, 2023 · BabylonBee.com

    DENVER, CO — “It’s a great time to buy a house right now,” said Jazz Price, the realtor who gets paid if you buy a house right now.

    Jazz reaffirmed that it was a great time to buy as he gave in-person showings to prospective buyers who felt a little uneasy about the state of the housing market.”

    https://babylonbee.com/news/its-a-great-time-to-buy-a-house-says-realtor-who-gets-paid-if-you-buy-a-house

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    • Brent Nyitray's avatar
      Brent Nyitray, on December 15, 2023 at 7:50 pm said:

      The funny thing is that a lot of Air BnBs from the 0% interest rate days are collapsing in price. Especially in the super-expensive areas like the West Coast.

      Many took out bridge loans looking to flip and got caught with the Old Maid.

      As Warren Buffett would say, when the tide goes out, you see who has been swimming naked.

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  8. Brent Nyitray's avatar
    Brent Nyitray, on December 15, 2023 at 6:11 pm said:

    Its a cult. There’s 10 of ’em too… just like a real religion.

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  9. Lulu's avatar
    Lulu, on December 15, 2023 at 8:07 pm said:

    It’s clear to me that I can’t discuss politics here anymore but I think some of you might be interested in what my daughter is doing now. I know I mentioned it before that she’s working for a new start up in hydrogen (Koloma) as their lead developmental geologist but the company is beginning to be noticed now. Last month an article in the NY Times……………I know………….must be BS right? But now hydrogen has been named the runner up in breakthrough technology for the year.

    Also, it seems to me that the economy is making a generally good rebound if I’m not mistaken. I’m sure Biden won’t get much credit here but at least there are positive signs for us consumers. Prices are still high at the grocery store but otherwise, once interest rates decline, I think the tide will change re public opinion.

    In 1859, Edwin Drake sank 20 meters of cast-iron pipe into the earth beneath Titusville, Pennsylvania, and struck oil, collecting it in a bathtub. The well kicked off the U.S. oil rush and changed the world. This year saw the start of another energy rush, this one based on hydrogen produced naturally within the Earth. Unlike oil the gas could be a tonic, not a toxin, for the climate.

    Historians might one day trace its birthplace to another unlikely town: Bourakebougou, Mali. In 2012, engineers unplugged a borehole there that had been cemented shut in 1987, after a careless cigarette sparked an explosion. The gases it spewed turned out to be 98% hydrogen. A generator was hooked up. Producing only water as exhaust, it supplied the village with its first electricity. Curiously, after a decade of withdrawals, gas pressures in the borehole have not decreased—a suggestion that a deep source is replenishing the hydrogen.

    Inspired by the discovery, prospectors are now finding signs of significant hydrogen deposits on every continent save Antarctica. Venture capital is flowing to startups such as Koloma which came out of stealth mode in July with $91 million in funding, including investments from Bill Gates’s Breakthrough Energy Ventures. In September, the U.S. Geological Survey (USGS) launched a research consortium with support from Chevron and BP, and the Advanced Research Projects Agency-Energy began a $20 million natural hydrogen R&D program.

    Are any of you following the abortion controversy in Texas?

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    • lmsinca's avatar
      lmsinca, on December 15, 2023 at 8:38 pm said:

      Hey sorry about the lack of bold at the end of the link. Also here’s the link………..I got put in time out when I posted waiting for approval LOLOL

      https://www.science.org/content/article/breakthrough-of-the-year-2023

      The number one breakthrough is apparently the new weight loss drugs………..not sure how I feel about that yet?????

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    • jnc4p's avatar
      jnc4p, on December 15, 2023 at 10:16 pm said:

      “Are any of you following the abortion controversy in Texas?”

      Yes. Assuming the reporting is accurate it should pretty clearly qualify as a health of the mother exception. I don’t know the precise details of the Texas law.

      But of course, I’m pro-abortion to start with.

      Also, glad to hear your daughter is doing well. How’s Walter?

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      • ScottC's avatar
        ScottC, on December 17, 2023 at 6:28 am said:

        jnc:

        Assuming the reporting is accurate it should pretty clearly qualify as a health of the mother exception.

        Why do you think so? Based on what I read, any risks the mother faces comes from the fact that she will have to deliver the baby via C-section, something she was aware of even prior to this pregnancy, having done it twice before, and something she was willing to do until she discovered the baby has a fatal condition. So it seems that the abortion was being sought not for health reasons, but rather because she didn’t want the baby if it has this fatal condition.

        The court ruled against the doctor (it was the doctor who was seeking the court’s pre-authorization to provide the abortion, not the mother) because the exception to the abortion law requires a doctor to determine that the pregnancy is either life threatening or “poses a serious risk of substantial impairment of a major bodily function”, and according to the court, the doctor “could not, or at least did not, attest to the court that Ms Cox’s condition poses the risks the exception requires.”

        If that is true, how could the court rule any differently?

        Here’s the Texas Supreme Court opinion:

        Click to access 230994pc.pdf

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    • ScottC's avatar
      ScottC, on December 17, 2023 at 5:49 am said:

      lms:

      Are any of you following the abortion controversy in Texas?

      Yes, I am.

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  10. lulu's avatar
    lulu, on December 15, 2023 at 8:47 pm said:

    Apparently I am both Lulu and lmsinca now at ATIM.

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  11. Let the mutherfuker burn!'s avatar
    Let the mutherfuker burn!, on December 16, 2023 at 11:00 am said:

    At this point I think it’s obvious that McCarthy could fuck up a wet dream.

    https://x.com/jeremybwhite/status/1735818747439616434?s=46&t=vSGsUlnc4rLxcUf7zfUiHg

    https://www.politico.com/news/2023/12/12/california-house-mccarthy-succession-00131248

    Hope he cut his lobbying deal post Congress right after he became speaker because he seem pretty inept to me. Seriously, what would he be able to deliver anybody?

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  12. Brent Nyitray's avatar
    Brent Nyitray, on December 16, 2023 at 2:58 pm said:

    Conservatives pounce

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  13. jnc4p's avatar
    jnc4p, on December 17, 2023 at 12:07 pm said:

    Worth noting:

    “Seasons Greetings from New Normal Germany
    CJ Hopkins
    Dec 17, 2023”

    https://cjhopkins.substack.com/p/seasons-greetings-from-new-normal-142

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  14. jnc4p's avatar
    jnc4p, on December 17, 2023 at 3:17 pm said:

    Of course the Atlantic advocates for this:

    “Why Isn’t the Government Doing More About the Housing Crisis?

    The Department of Housing and Urban Development should consider doing some housing and urban development.

    By Annie Lowrey”

    https://www.theatlantic.com/ideas/archive/2023/12/housing-crisis-hud-authority/676368/

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    • Brent Nyitray's avatar
      Brent Nyitray, on December 17, 2023 at 3:28 pm said:

      I got this from an old-timer from the West Coasts:

      “A perfect example of how long it takes to get things done was when I was Chairman of the Berkeley Housing Authority. We were having a ground-breaking ceremony to start construction on a 57-unit low-income housing project. There was a bunch of us standing with shovels in the ground, posing for the press, and I asked Warren Widener, the Mayor (and the guy who appointed me), when this project was first authorized by the city council. He answered with one word: “1956.” We were breaking ground in 1978, so it took 22 years to build all of 56 units.”

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  16. Brent Nyitray's avatar
    Brent Nyitray, on December 17, 2023 at 5:15 pm said:

    40% delinquency rate on student loan repayment resumption

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  18. jnc4p's avatar
    jnc4p, on December 18, 2023 at 9:57 am said:

    An actual interesting piece on Trump in the NYT:

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    • Brent Nyitray's avatar
      Brent Nyitray, on December 18, 2023 at 10:17 am said:

      The left is incapable of grasping the concept that Trump is a reaction to them, and that the left is the authoritarian party these days

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  19. Let the mutherfuker burn!'s avatar
    Let the mutherfuker burn!, on December 18, 2023 at 3:34 pm said:

    At least he wasn’t filmed being butt-fucked in a Senate hearing room using the chair occupied by Senator Klobachar.

    https://x.com/phil_lewis_/status/1736793374949048822?s=46&t=vSGsUlnc4rLxcUf7zfUiHg

    Not all heroes wear capes.

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  20. Let the mutherfuker burn!'s avatar
    Let the mutherfuker burn!, on December 18, 2023 at 6:01 pm said:

    So true.

    https://x.com/greg_price11/status/1736821637407027321?s=46&t=vSGsUlnc4rLxcUf7zfUiHg

    Like the Aztecs but worse. Or the Sodomites, plus the Aztecs and then throw in the Red Guard and Pol Pots crew. The Nazi’s only ever aspired to be a horrific and MAGA Republicans.

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