Markets slip lower on rate cut doubts by a Fed official

Dow pulled back 23 after its recent rise, decliners over advancers about 3-2 & NAZ was up 20.  The MLP index fell 2+ to the 249s & the REIT index was off 3+ to the 394s following its recent rise.  Junk bond funds were mixed & Treasuries had more buying taking the yield on the 10 year Treasury down to 3.9%.  Oil slid fractionally to 71 & gold went up 5 to 2049.

AMJ (Alerian MLP Index tracking fund)

New York Federal Reserve Pres John Williams said rate cuts are not a topic of discussion at the moment for the central bank.  “We aren’t really talking about rate cuts right now,” he added.  “We’re very focused on the question in front of us, which as chair Powell said… is, have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%? That’s the question in front of us.”  The Dow shot to a record & the 10-year Treasury yield fell below 4.3% this week as traders took the Fed's forecast for 3 rate cuts next year as a sign the central bank was changing its tough stance & would start cutting rates sooner than expected next year.  Traders are betting that the central bank would cut rates deeper than 3 times, according to fed funds futures & futures markets also indicate that the Fed could start cutting rates as soon as Mar.  Williams is reining in some of that enthusiasm a bit, it appears.  “I just think it’s just premature to be even thinking about that,” Williams said, when asked about futures pricing for a rate cut in Mar.  Williams said the Fed will remain data dependent & if the trend of easing inflation were to reverse, it's ready to tighten policy again.  “It is looking like we are at or near that in terms of sufficiently restrictive, but things can change,” Williams continued.  “One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”  The Fed projected that its favorite inflation gauge, the core personal consumption expenditures price index, will fall to 2.4% in 2024, a further decline to 2.2% by 2025 & finally reach its 2% target in 2026.  The gauge rose 3.5% in Oct on a year-over-year basis.  “We’re definitely seeing slowing in inflation. Monetary policy is working as intended,” Williams said.  “We just got to make sure that … inflation is coming back to 2% on a sustained basis.”

Fed’s John Williams says the central bank isn’t ‘really talking about rate cuts right now’

Mortgage rates have finally fallen below 7% for the first time in months & purchase applications are on the rise.  Still, the low inventory of homes on the market is keeping home prices elevated, providing little comfort for prospective buyers.  Freddie Mac's latest Primary Mortgage Market Survey showed that the average rate for the benchmark 30-year fixed-rate mortgage fell to 6.95% this week, down from 7.03% last week but up from 6.31% a year ago.  At the same time, the rate for a 15-year fixed mortgage rose, averaging 6.38% after coming in last week at 6.29% & 1 year ago, the rate on a 15-year fixed note averaged 5.54%.  "Potential homebuyers received welcome news this week as mortgage rates dropped below seven percent for the first time since August," said Sam Khater, Freddie Mac's chief economist.  "Given inflation continues to decelerate and the Federal Reserve Board’s current expectations that they will lower the federal funds target rate next year, we likely will see a gradual thawing of the housing market in the new year."  The Mortgage Bankers Association reported that mortgage applications have increased for 6 weeks straight as mortgage rates have continued their downward trajectory.  However, purchase volume remained 18% lower than the same week a year ago.  Many homeowners who are locked in at much lower rates are opting to stay put rather than sell, contributing to inventory shortage.  According to data from Realtor.com, roughly 2/3 of outstanding mortgages have rates below 4% & more than 90% have rates lower than 6%.  Economists do not expect the affordability crisis to end any time soon.  "The disparity between today’s higher market mortgage rates and the lower rates that existing homeowners benefit from on their current mortgages, commonly referred to as the lock-in effect, is expected to play a role in maintaining low inventory levels," Realtor.com economist Jiayi Xu said.  "As home shoppers compete over the still-limited inventory, prices are expected to stay elevated, maintaining affordability as a top concern."

Mortgage rates dip below 7% amid climbing demand

The 10-year Treasury note yield slipped, adding to its sharp downturn this week, as traders brace for possible Federal Reserve rate cuts next year.  The yield on the 10-year Treasury fell 2 basis points to 3.914%.  It had fallen below the 4% level for the first time since Aug yesterday, reaching its lowest level since Jul.  The 2-year Treasury yield was last up by less than one basis point at 4.41%, near the closely watched 4.5% level.  Yesterday, it hit levels not seen since May.  At the start of the week, the 10-year traded near 4.22%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Treasury yields hit multi-month lows this week as the Fed indicated that it would cut interest rates 3 times next year at the conclusion of its latest meeting.  In line with market expectations, the Fed left interest rates unchanged for the 3rd time in a row, also boosting hopes among investors that the central bank's rate-hiking cycle has come to an end.  The Fed also noted that inflation had cooled in the last year, but prices were still somewhat “elevated.”  Earlier in the week, the consumer price index & producer price index for Nov both suggested pressures from rising prices were easing.

10-year Treasury yield slips, adds to this week’s steep decline

The stock market is vastly overbought & Williams (above) is trying to bring a sense of reality to investors.  Mar is a relatively a long time away.  Even with a few rate cuts next year, interest rates will still be at high levels which can be a burden on businesses & consumers.  In addition, prior to the rally on Wed, the advance decline data for stocks was been weak. meaning not all stocks were participating the rise.  Nervous investors have been buying gold & Treasuries.

Dow Jones Industrials