The bond market had its head on a swivel as mixed signals came in from all over. Two things from last week became certain - the housing market is heating up and the Fed's policy to lower inflation continues to work. The average 30-year fixed rate conventional loan ended the week slightly lower than last week at 6.68%! 

Pending Home Sales JUMP and New Home Sales Beat Expectations

Pending home sales rose 8.3% month over month in December, according to the newest data from the National Association of Realtors (NAR) after analysts had expected pending home sales to rise just 2%. It was the largest monthly jump in pending home sales since 2020! 🤯🤯🤯 The news comes as a shock as it appears homebuyers have started to come back into the market as interest rates have fallen. 

Sales of new construction homes in December also reported last week and beat expectations (664k (actual) vs 649k (expected). This is 8% rise from November 2023, further cementing that the housing market is rebounding with lower rates.

Unlike existing home inventory , there's PLENTY of inventory for new home sales. The Department of Housing and Urban Development (HUD) reported that, as of December, there is currently 8.2 months of supply at the current rate (vs the 3.2 months of supply for existing homes as of December).

The Labor Market is being Stubborn

Layoffs remained fairly low through mid-January. While weekly filings for unemployment benefits ticked up 25,000 to 214k last week (beating expectations), they are still too low. Last week's report put the four-week moving average at 202k, which is lower than the weekly average in the 2 years before the pandemic–and much less than the 223,500 average in 2023. 

Inflation News, Spending Data and Q4 GDP

4th Quarter GDP numbers came in and left everyone in disbelief as the economy grew at 3.3% quarter-on-quarter annualized , way above the 2% consensus.   😲😲 The news was a bit of a blow to those hoping for a broad slowdown in the US economy.

Analysts point to significant consumer spending as a reason for the big beat in GDP.  Consumers account for about 70% of the total U.S. economy and their spending expanded at a 2.8% annual rate. While spending may be fueling growth today, keep in mind that credit card debt has risen significantly and  the savings rate reportedly fell to 3.7% in December, putting it at the lowest level in a year.

Thankfully, the significant consumer spending did not have an impact on the personal consumption expenditures (PCE) report, which measures how much US residents spend on goods and services. The PCE report is one of the Fed's most important tools for understanding whether their policies are working!

Core PCE increased 0.2% month over month and was up just 2.9% on a yearly basis  (down from 3.2% on a yearly basis in November). It's the first time we've been below 3% since March 2021! Even more impressive, when looking over the last 3 and 6 months, core PCE inflation now sits below the Fed’s inflation target of 2%, coming in at 1.5% and 1.6% respectively. 🤩🤩🤩

Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote “It is hard to say which is more remarkable: that GDP growth accelerated last year following the Fed’s most aggressive tightening campaign in decades, or that core inflation nevertheless fell back to the 2% target in annualized terms over the second half of the year.” “Either way, it is time for Fed officials to take the win and start dialing back the level of policy restrictiveness soon."

What to watch for this week...

We'll likely be able to have a clearer picture of just how soon the Fed will start dialing back restrictiveness after Fed Chairman Jerome Powell gives his press conference on Wednesday, January 31st. There's currently a 49.6% chance that the Fed will cut rates in March (up from last week) and an 90.6% chance that there will be a rate cut by May 1st. 

This week has A LOT of news - employment data, home price data AND the Federal Reserve conference. Interest rates could move a lot this week so be prepared!