Despite minimal changes in economic indicators, there's a shifting perception regarding the Fed's monetary policy. While Central Banks plans hint at interest rate cuts, uncertainty looms over the timing, both domestically and internationally, especially with fluctuations in investor sentiment influenced by recent employment data.
Perhaps the Fed had it right when it said, "Higher for longer."
In terms of inflation, economic growth, and employment, recent months have seen little significant change. However, there's been a notable shift in how the Federal Reserve's monetary policy is perceived and the timing of its potential adjustments. The December FOMC meeting has the Fed eyeing up to three cuts in short-term interest rates this year, with June emerging as a focal point for the first adjustment. The phrase, kicking the can down the road, comes to mind since the Fed failed to cut rates in their January, March, or now most likely, May FOMC meetings.
Yet, all of this hinges on whether the desired lower inflation trend materializes. Despite a couple of higher inflation readings at the start of the year, Fed Chair Powell reiterated that the overall landscape remains one of sturdy growth, a resilient but recalibrating job market, and inflation gradually converging to 2%, albeit with some bumps. The Fed Chairman's remarks have remained relatively consistent since initially spiking the proverbial punch bowl after the December FOMC meeting.
Source: CMEGroup Exchange
Investor sentiment, however, appears less convinced lately about a June move. One month ago, 55.2% of investors saw a .25-point interest rate cut. Today, that number has dropped to 50.8%. Concurrently, one month ago, investors felt the chance of rates remaining the same at the June meeting was only 30.6%. Yet, the robust hiring of 303K new jobs created, outlined in Friday's March employment report, tempered much of the enthusiasm for rate cuts, with the likelihood of a June cut now hovering at 46.8%.
During the post-March Fed meeting press conference, Chairman Powell was asked whether strong hiring alone would deter rate cuts. His response was clear: strong job growth, on its own, isn't sufficient to dissuade concerns about inflation. However, there's currently a division among investors regarding this standpoint. There should be, as the recent consumer spending report showed a .8% increase, beating consensus of .4%. At the same time, personal income came in as expected at .3%. The employment situation makes the consumer feel confident about their future.
This dynamic reflects a delicate balancing act between economic indicators and Fed policy, underscoring the uncertainty and volatility inherent in the current financial landscape.
Mortgage Rates
As of April 03, the 30-year fixed mortgage rates, as reported by Freddie Mac, increased to 6.82%, up from 6.79%. During the same reporting period, the 10-year Treasury yield, which impacts mortgage rates, rose to 4.35% compared to the prior week at 4.19%. The 10-year Treasury yield was much more volatile this week and should negatively impact fixed-rate mortgages again next week. The current 30-year fixed rate mortgage of 6.82% to one year ago was 6.28%, a 54 basis point increase.
Yields Technical Picture
Source: Barchart
The 10-year Treasury yield, $TNX, has steadily risen since the first days of 2024. The long end of the yield curve appears to believe the Fed's original statement, higher for longer, rather than the proverbial spiked punch bowl announcement in December of multiple rate cuts in 2024.
Traders of Financial Futures (TFF) Report
The Leveraged Funds traders remain bearish in the 10-year Treasury market.
Source: CEMGroup Exchange
They continue to aggressively add new short positions (red bars) as the price of the 10-year Treasury declines (yellow line).
After a brief profit-taking period in November 2023, they aggressively began selling again in mid-December 2023 and January 2024. They recently reduced their short positions until February and added new ones for the past four weeks.
Source: CMEGroup Exchange
Another TFF report graph shows that Leveraged Fund traders have been net short in the 10-year Treasury market since July 2022. As prices of these Treasuries (yellow line) have declined, the Leveraged Funds have continued to sell aggressively.
At some point, the trend will turn up for Treasury prices. But, in the meantime, it's evident that a market is never too low to sell or too high to buy.
In closing….
The current financial landscape presents a picture marked by subtle shifts in perception surrounding the Federal Reserve's monetary policy. Despite fluctuations in economic indicators, there's uncertainty regarding the timing and extent of potential interest rate adjustments, both domestically and internationally. While recent data, such as exuberant job growth, has tempered some enthusiasm for immediate rate cuts, the balance between economic indicators and Fed policy underscores the volatility inherent in the markets.
Investor sentiment, evidenced by fluctuating expectations of rate cuts, reflects the complexity of interpreting economic data and Fed statements. The divergence in opinions underscores policymakers' challenges in balancing promoting economic growth and managing inflationary pressures.
Moreover, the technical aspects of the market, as indicated by mortgage rates and Treasury yields, further influence investor behavior. While the trajectory of downward Treasury prices may eventually reverse, the current trend underscores the adage that "a market is never too low to sell or too high to buy."
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
