Markets hesitate while Nasdaq stocks are heavily sold

Dow rose 104, decliners over advancers about 5-4 & NAZ sank 446.  The MLP index inched higher in the 296s & the REIT index was up another 4+ to the 405s.  Junk bond funds fluctuated following recent strength & Treasuries had limited selling allowing yields to edge higher (more below).  Oil rebounded 1+ to the 82s & gold inched up 1 to 2479 after yesterday's dramatic gain.

Dow Jones Industrials 

Federal Reserve Governor Christopher Waller suggested that interest rate cuts are ahead soon as long as there are no major surprises on inflation & employment.  “I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view,” Waller said.  “So, while I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”  Keeping with statements from other policymakers, Waller's sentiments point to an unlikelihood of a rate cut when the Federal Open Market Committee meets later this month, but a stronger likelihood of a move in Sep.  Central bankers have become more optimistic from data in recent months that has shown inflation easing after a surprisingly higher move for the first 3 months in 2024.  Waller outlined 3 potential scenarios in the days ahead: One, in which the inflation data turns even more positive & justifies a rate cut in “the not too distant future”; a 2nd in which the data fluctuates but still points toward moderation; & a 3rd in which inflation turns higher & forces the Fed into a tighter policy stance.  Of the 3, he considers the 3rd scenario of unexpectedly stronger inflation as the least likely.  “Given that I believe the first two scenarios have the highest probability of occurring, I believe the time to lower the policy rate is drawing closer,” Waller said.  His comments are of particular note because he has been among the more hawkish FOMC members this year, or those who have advocated for tighter monetary policy as fears escalated that inflation is proving more durable than expected.  In May, Waller said that he expected cuts to be “several months away” as he awaited more convincing data that inflation was receding. This speech indicated that the threshold is close to being met.  For 1, he said the labor market “is in a sweet spot” in which payrolls are expanding while wage gains are cooling.  At the same time, the consumer price index declined 0.1% in Jun, while the 3.3% annual rate for core prices was the lowest since Apr 2021.  “After disappointing data to begin 2024, we now have a couple of months of data that I view as being more consistent with the steady progress we saw last year in reducing inflation, and also consistent with the FOMC’s price stability goal,” he said.  “The evidence is mounting that the first quarter inflation data may have been an aberration and that the effects of tighter monetary policy have corralled high inflation.”

Fed Governor Waller sees central bank ‘getting closer’ to an interest rate cut

Treasury yields were little changed today as investors considered the state of the economy & outlook for interest rates.  The yield on the 10-year Treasury rose by less than 1 basis point at 4.17% & the yield on the 2-year Treasury was last at 4.46% after adding just over 1 basis point.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  Investors considered economic data & comments from Federal Reserve officials slated for the week after central bank Chair Jerome Powell earlier this week said interest rates would likely be cut before inflation reaches 2%.  Waiting until the Fed's 2% target rate has been reached would likely be too late & could see inflation fall below this level, he said.  But Powell also noted the Fed was still looking for greater confidence that inflation is indeed on its way back to the central bank's target.  The latest reason for optimism came today, after Fed Governor Christopher Waller's comments (read above).  One more set of inflation data, the personal consumption expenditures price index, is due before the Fed meets at the end of the month, when investors are hoping to get hints that rate cuts could begin in the coming months.  Fed funds futures trading implies a 100% likelihood the Federal Reserve will lower rates in Sep, according to the CME FedWatch tool.

Treasury yields hold steady as investors weigh state of economy

Mortgage rates dropped to the lowest level since Mar last week, sparking swift demand in refinancing.  Homebuyers, however, seemed unimpressed.  Applications to refinance a home loan jumped 15% last week, compared with the previous week, to the highest level since Aug 2022, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index.  Demand was 37% higher than the same week 1 year ago when mortgage rates were exactly the same.  While the increase last week was large, it is coming off a very small base.  Refinance demand is still more than 70% lower than it was in early 2020, before the Covid-19 pandemic hit.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766K or less) decreased to 6.87% from 7.00%, with points dropping to 0.57 from 0.60 (including the origination fee) for loans with a 20% down payment.  “Mortgage rates declined last week, as recent signs of cooling inflation and the increased likelihood of Fed rate cuts later this year pulled them lower,” said Joel Kan, MBA’s VP & deputy chief economist.  Applications for a mortgage to purchase a home fell 3% for the week & were 14% lower than the same week 1 year ago.  Buyers today are facing a lean & pricey market, & now, with the expectation that rates could drop even more, they may be waiting on the sidelines for a better opportunity.  More supply is slowly coming onto the market & sellers are starting to reduce prices, especially for homes that have been sitting on the market for a while.

Mortgage refinance demand jumps to a 2-year high, as interest rates drop

After a spectacular for the Dow to new heights, the stock market needs to take a pause.  A lot is riding on rate cuts starting shortly.  Investors are increasingly confident that the global economy is headed for a soft landing, where inflation falls toward the Federal Reserve's target.  But continued high interest rates could send the economy into a serious slowdown.  Alternative narratives need to be evaluated.