The Dots Put an Exclamation Point on Record-Breaking Drop in Rates

We came into this week expecting the Fed's Dot Plot to set the tone, or at least to create a good amount of movement in rates, and that's exactly what happened.

The dot plot refers to a chart that appears 4 times a year in economic projections released by the Fed.  Projections are not the same as predictions, but the dots still provide the market with valuable insight as to how the Fed will change short term interest rates if the economy evolves as expected.

Specifically, the Fed sees job growth generally moderating and inflation gradually falling toward target levels.  The dots essentially say "if that stuff keeps happening in the same way it has been happening, here's where we expect the Fed Funds rate to be."

The last dot plot came out with the September Fed meeting.  It showed the median rate staying about 0.50% higher than the previous dot plot in June.  Rates didn't love that.  With support from resilient economic data, the dots were a catalyst for a push up to the highest interest rates in decades by the end of October.

Heading into this week's dot plot, we knew things would look better for rates based on recent Fed speeches and more moderate economic data over the past 2 months, but we didn't know how much better.  Here's exactly how things changed for the "end of 2024" time frame most scrutinized by market participants:

20231215 nl4.png

The median Fed member now sees the Fed Funds Rate at 4.625% by the end of 2024 as opposed to the 5.125% conveyed in September's dot plot.  This was clearly better news than the market was expecting because here's what rates did when it came out:

20231215 NL5.png

2yr Treasury yields have more in common with near-term Fed Funds Rate expectations while 10yr yields move more like mortgage rates.  Speaking of mortgage rates, they had quite a week, although you'd only know it by looking at actual daily averages such as the Mortgage News Daily index as opposed to weekly surveys that don't yet reflect the huge drop in the 2nd half of the week.

20231215 nl3.png

While Freddie Mac's rate index fell by bigger amounts in the 1980s on a few occasions, this is the biggest 5 week drop on record for the MND index.  The following chart shows the 5-week change in rates.  In other words, the drop that began in November is the biggest we've seen in decades, even if only slightly bigger than the drop seen last year.

20231215 nl6.png

In addition to the dot plot, Fed Chair Powell mentioned that the Fed had begun to discuss rate cuts.  It's important to keep in mind that Powell has also been clear that the Fed could actually hike rates again if inflation were to pick back up.  He's also been clear in saying that inflation would need to keep moving lower in order to make rate cuts a reality.  As far as this week's Consumer Price Index (CPI) data was concerned, we're on the path, but still far from the destination.

20231215 nl1.png

We won't get CPI again until the new year.  Moreover, we won't get much by way of other relevant economic data before then either.  Combine that with the typical decline in trader participation in late December and it's not unfair to say the jury is pretty much out for the next few weeks.  Rates may ebb and flow a bit, but the important decisions are on hold until big-ticket data and more robust participation return after the holiday break.  

Recently Released Economic Data

Time Event Actual Forecast Prior
Monday, Dec 11
11:30 3-Yr Note Auction (bl) 50
Tuesday, Dec 12
8:30 Nov y/y CORE CPI (%) 4% 4% 4%
8:30 Nov m/m CORE CPI (%) 0.3% 0.3% 0.2%
Wednesday, Dec 13
7:00 Dec/08 MBA Purchase Index 149.6 144.5
7:00 Dec/08 MBA Refi Index 445.8 373.3
8:30 Nov Core Producer Prices MM (%) 0% 0.2% 0%
8:30 Nov Core Producer Prices YY (%) 2% 2.2% 2.4%
14:00 Fed Interest Rate Decision 5.5% 5.5% 5.5%
14:00 FOMC Economic Projections
14:30 Fed Press Conference
Thursday, Dec 14
8:30 Nov Import prices mm (%) -0.4% -0.8% -0.8%
8:30 Dec/09 Jobless Claims (k) 202K 220K 220K
8:30 Nov Retail Sales (%) 0.3% -0.1% -0.1%
Friday, Dec 15
8:30 Dec NY Fed Manufacturing -14.5 2 9.1
9:15 Nov Industrial Production (%) 0.2% 0.3% -0.6%
9:45 Dec S&P Global Services PMI 51.3 50.6 50.8
Monday, Dec 18
10:00 Dec NAHB housing market indx 37 36 34
Tuesday, Dec 19
8:30 Nov Housing starts number mm (ml) 1.372M
Wednesday, Dec 20
7:00 Dec/15 MBA Refi Index
7:00 Dec/15 MBA Purchase Index 148.7 149.6
10:00 Nov Existing home sales (ml) 3.82M 3.77M 3.79M
Thursday, Dec 21
8:30 Dec Philly Fed Business Index -10.5 -3 -5.9
8:30 Q3 GDP (%) 4.9% 5.2% 2.1%
8:30 Dec/16 Jobless Claims (k) 205K 215K 202K
Friday, Dec 22
7:30 Nov Building permits: number (ml) 1.467M 1.498M
8:30 Nov Core PCE (m/m) (%) 0.1% 0.2% 0.2%
8:30 Nov Core PCE Inflation (y/y) (%) 3.2% 3.3% 3.5%
8:30 Nov Durable goods (%) 5.4% 2.2% -5.4%
10:00 Nov New Home Sales (ml) 0.59M 0.685M 0.679M
10:00 Dec U Mich conditions 73.3 74 68.3
10:00 Dec Consumer Sentiment (ip) 69.7 69.4 61.3
14:00 Christmas Early Close
Wednesday, Jan 10
13:00 10-yr Note Auction (bl) 37
Thursday, Jan 11
13:00 30-Yr Bond Auction (bl) 21
Wednesday, Jan 17
13:00 20-Yr Bond Auction (bl) 13

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