Morning Report: The Fed raises rates

Vital Statistics:

 

Last Change
S&P futures 2511 6.5
Eurostoxx index 339.04 -2.44
Oil (WTI) 47.96 1.72
10 year government bond yield 2.77%
30 year fixed rate mortgage 4.60%

 

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are flat.

 

As expected, the Fed hiked rates 25 basis points yesterday. The vote was unanimous, and the statement was pretty bland. The forecasts were tweaked slightly, but nothing major. The biggest change was in the dot plot, which basically removed one tightening from 2019’s forecast. The left plot is September, while the right one is December. Note that the dispersion has decreased as well.

FOMC dot plot

 

Bonds took the tightening favorably, while stocks used it as an excuse to sell off. The initial head fake in the bond market was intense, with 2.86% printing before falling below 2.80 and eventually to 2.76%. MBS spreads widened considerably before settling in. The press conference was uneventful, with Powell dodging questions about Trump and the Central Bank’s independence while stressing that the economy is extremely strong right now and it made sense to raise rates. He also said that the Fed Funds rate is now at the lower end of the neutral range and the Fed has no intentions of deviating from its pace of balance sheet reduction.

 

Existing home sales rose 1.9% in November, for a second straight month. Lawrence Yun, NAR’s chief economist, says two consecutive months of increases is a welcomed sign for the market. “The market conditions in November were mixed, with good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.” The median home price rose 4.2% to $257,700, while inventory fell to 1.74 million. This represents a 3.9 month supply, which is well below what would be considered an equilibrium market. “A marked shift is occurring in the West region, with much lower sales and very soft price growth,” says Yun. “It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to lack of affordable housing inventory.” I wonder if Chinese money is exiting the area as their economy slows and you start seeing credit issues there. Finally, days on market rose to 42 and the first time homebuyer accounted for 33% of sales.

 

The Senate passed a stopgap spending measure which would fund the government through February. No word on whether the House will go along, but it certainly looks like any sort of shutdown over the holiday period isn’t going to happen.

 

 

Author: Brent Nyitray

Why do you need new bands? Everyone knows rock attained perfection in 1974. It's a scientific fact. - Homer Simpson

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