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Rates Defend The Ceiling. High Stakes Week(s) Ahead

This week was more active and interesting than the previous example with a few important economic reports helping rates avoid breaking their recent ceiling.

Using 10yr Treasury yields as a benchmark for this week's rate movement, we see the biggest drops on Thursday and Friday.  

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Coming into the week, the market was most focused on Thursday's inflation data.  Some analysts viewed the as-expected result as a good thing for rates simply because it avoided making the problem worse.  The other data definitely mattered though.  For example, one part of the weekly jobless claims data showed the 2nd highest level of "continued claims" in more than 2 years.  

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Keep in mind that this is similar to saying "the 2nd highest since the last recession" because, like the unemployment rate, this metric is not prone to multiple significant reversals.  There's been more uncertainty than normal surrounding these sorts of numbers recently, because there had been some signs it would move lower.  This week's spike reminds markets that once things shift, they tend to shift quickly (even if "quick" is measured in months or years in this case).

The following chart shows a longer term view of continued claims.  Notice the past examples where it began to express some indecision a year or two before the abrupt spikes.  One issue with the present environment is that we can't really set a baseline time for when indecision began due to distortion caused by covid-related lockdowns.  If there's one "best" takeaway, it's that it could take much more time than many people expect before data indicates the next recession.

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Friday's manufacturing data sang a similar tune with the highly-regarded ISM Manufacturing index coming in well below forecast.  The index is no stranger to these levels over the past year, but markets reacted for other reasons.  First off, by moving lower instead of higher, the index avoids a "breakout" that would have suggested some sort of economic reinvigoration. 

20240301 nl1.png

There are also other sub-components to the ISM index and they suggested cooler inflation and employment data ahead (at least as far as the manufacturing sector is concerned).  Much like the headline index, the "prices paid" component also avoided breaking its recent ceiling.

20240301 nl2.png

If economic metrics and inflation indicators are shying away from breaking ceilings, it makes interest rates more keen to break through floors.  We saw hints of such breakouts as a result.  Here's a longer term view of 10yr Treasury yields, showing Friday's break below the recent sideways trend.

20240301 nl7.png

When Treasury yields are falling, mortgage rates are typically doing the same.  This week was no exception, although the average lender is not quite through the lowest levels of the past 2 weeks.  Notably, some media coverage will be pointing to HIGHER rates this week, but only if they're relying on stale weekly surveys.

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In a very real sense, this week's econ data and rate reactions were merely a warm-up for the weeks ahead.  Next week brings data that could have a much bigger impact--especially Friday's big jobs report.  The following week brings the next Consumer Price Index (CPI) which is at least as important.  If that upcoming data tells a different story than this week's data, rates could shoot right back up--threatening or breaking the recent ceiling.

But if the labor market softens and if price pressures ease, the rate market will continue to breathe a sigh of relief hinted at in this week's action.  For the housing market, it would not be a moment too soon.  Granted, rates aren't the only factor constraining homebuying activity, but lower rates would almost certainly help.  Help is needed according to this week's Pending Home Sales index which fell back near its long-term lows.

20240301 pending sales.png

Recently Released Economic Data

Time Event Actual Forecast Prior
Monday, Feb 26
10:00 Jan New Home Sales (ml) 0.661M 0.68M 0.664M
10:00 Jan New Home Sales (%) (%) 1.5% 8%
Tuesday, Feb 27
8:30 Jan Durable goods (%) -6.1% -4.5% 0%
9:00 Dec FHFA Home Prices y/y (%) 6.6% 6.6%
9:00 Dec CaseShiller 20 mm nsa (%) -0.3% -0.2%
9:00 Dec Case Shiller Home Prices-20 y/y (% ) 6.1% 6% 5.4%
9:00 Dec FHFA Home Price Index m/m (%) 0.1% 0.3%
10:00 Feb CB Consumer Confidence (%) 106.7 115 114.8
Wednesday, Feb 28
8:30 Q4 GDP (%) 3.2% 3.3% 4.9%
Thursday, Feb 29
8:30 Feb/17 Continued Claims (ml) 1905K 1874K 1862K
8:30 Feb/24 Jobless Claims (k) 215K 210K 201K
8:30 Jan Core PCE (m/m) (%) 0.4% 0.4% 0.2%
8:30 Jan Core PCE Inflation (y/y) (%) 2.8% 2.8% 2.9%
9:45 Feb Chicago PMI 44 48 46
10:00 Jan Pending Home Sales (%) -4.9% 1% 8.3%
Friday, Mar 01
10:00 Feb ISM Mfg Prices Paid 52.5 53 52.9
10:00 Feb ISM Manufacturing PMI 47.8 49.5 49.1
10:00 Feb Consumer Sentiment (ip) 76.9 79.6 79

Upcoming Economic Data

Time Event Forecast Prior
Tuesday, Mar 05
9:45 Feb S&P Global Services PMI 52.5
10:00 Feb ISM N-Mfg PMI 53 53.4
Wednesday, Mar 06
8:15 Feb ADP jobs (k) 150K 107K
10:00 Jan USA JOLTS Job Openings 8.895M 9.026M
10:00 Fed Chair Powell Testimony
Thursday, Mar 07
8:30 Mar/02 Jobless Claims (k) 215K
10:00 Fed Chair Powell Testimony
Friday, Mar 08
8:30 Feb Average earnings mm (%) 0.3% 0.6%
8:30 Feb Non Farm Payrolls 200K 353K
8:30 Feb Unemployment rate mm (%) 3.7% 3.7%

Event Importance:
No Stars = Insignificant   |   Low   |   Moderate   |   Important   |   Very Important

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