Threading the Needle

Issue 358

By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial.

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Mortgage Solutions presents Issue 358 of Market Pulse. This commentary will provide Trusheim's perspective on the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.

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INFLATION, THE ECONOMY, THE MARKETS, AND THE FED…WHAT’S WRONG?

There was quite a lot of confusing news and mixed signals that we had to digest last week, so I am going to try to make sense of it all.

The Fed’s preferred measure of inflation, Personal Consumption Expenditures (PCE), moved closer to the Fed’s 2% target in August, rising at a 2.2% annual rate, down from 2.5% in July and the lowest since February 2021. The core PCE rate (ex., food, and energy) also rose in August and was up 2.7% from a year ago. Tame, but not dead.

Consumer Confidence tumbled in September, falling by the largest level in more than three years as fears grew about jobs and business conditions. The Conference Board’s index slid to 98.7, down from 105.6 in August.?

Economic growth has remained steady, with the latest Atlanta Fed’s GDPNow currently estimated to increase to 3.1%, and well above trend. What’s confusing is the fact that the Fed has never cut rates when GDP was running 2.5%-3.00%. Also, consider that the “average” fed funds rate over a 60-year period has been 5.42%. The current fed funds rate (before the recent 50 basis point cut) was 5.33%, which is?in line with historical norms. This is not 9/11, The GFC of 2009, or the global pandemic of 2020.

By their own admission, the Fed’s 2% inflation target won’t be hit until 2027. However, they plan to be on an aggressive rate cutting pace with the policy rate of fed funds slated to be near 3% by the end of 2025. That’s a 225 total basis point reduction.?

Overall, small business bankruptcies rose to 2,462 in the second quarter of 2024, the highest level since Q2 2011. That is more than we saw during the 2020 pandemic when the economy was completely closed.?

Manufacturing PMI fell to a 15-month low in September. University of Michigan sentiment, at 70.1 in August, has fallen back below the early pandemic bottom of?71.8 in April 2020. Auto loan defaults are at a 15-year high.?

Despite mortgage rates dropping to a 23-month low, the medium price of a new home fell 2% to $420,600. Prices are below the all-time high of $460,300 in October 2022 but are still well above the pre-pandemic high of $343,400. Home inventories rose to 467k from 459k, and the months’ supply of homes rose to 7.8 from 7.3.

The steady decline in mortgage rates to two-year lows has current homeowners rushing to take advantage of potential savings. Applications to refinance a home loan surged 20% last week compared with the previous week. Demand was a stunning 175% higher than the same week one year ago.?

Commodities are also enjoying the Fed’s interest rate cuts. The Bloomberg Commodity Index has risen 3.3% since the Fed meeting. Silver hit its highest level since 2012, trading above $32 per ounce and posting gains of 37% so far this year. Gold made another all-time high, trading above $2,700 per ounce last week, and is up over 31% year-to-date. Copper surged 6% last week and has posted an 18% gain on the year.?

It makes me wonder - With the economy (GDP) growing above trend, the equity markets making fresh all-time highs, commodity prices on the rise (led by gold & silver), bond and mortgage yields declining - Why is the Fed on such an aggressive policy path to take rates down by 225 basis points in 2025? Don’t they wonder (as I do) that this policy path could have some unexpected (inflation) consequences? Did they really thread the needle, goose the economy, subdue inflation, and avoid a recession???

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THE STOCK MARKET

The S&P 500 had yet another winning week, posting its 42nd record high of 2024 and trading up to 5767 before closing at 5738, up 36 points. The S&P 500 sports a 2024 return of 22%, with the Semiconductors returning 26%, the Utilities Index 31%, and the Nasdaq 21%. The Dow posted its 32nd record close for the year. Helping fuel last week’s rally was a fresh set of stimulus measures taking effect in China.?

There has not been?much change to the technical outlook. Initial support is near 5700, followed by 5650 and 5560. Our next upside target remains in the 5840 region, followed by 6000. Overall, I continue to view the equity markets as being the final phase of the bull markets from the 2009 and 2020 lows. Once I see an impulsive decline that breaks support levels, I will turn bearish. I foresee a 20% decline coming in the months ahead, and the fundamental/technical recession indicators are still in play.?

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THE BOND MARKET

It’s interesting and counterintuitive when you realize that since (Sept 18th) the day the Federal Reserve lowered interest rates by 50 basis points, the 10-year Treasury yield went HIGHER for eight consecutive days, rising from 3.59% to 3.82%. It finished last week at 3.75%, up two basis points, with a lot of traders scratching their heads.

As noted in last weekend’s MP report, the bulk of long-term interest rate declines are behind us. The 10-year Treasury yield is currently about 125 basis points below its peak, just above 5.00%. Bond traders have anticipated this move by the Fed for some time, and most (if not all) of the future rate cuts are already priced in. I would expect to see a range for the 10-year Treasury yield between 3.50%-4.00% in the months ahead. Mortgage rates may have more room to fall, possibly towards the 5.50% region.?

This Friday, we will get the monthly employment report for September. The Fed pointed to slowing in the labor market as a factor in its decision to jumpstart rate cuts.?

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Have a great week!?

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Jeff Trusheim is the CFO of Mortgage Solutions Financial. Jeff is a 30+ year veteran in the Wall Street arena, with a background in economics, risk assessment, and finance (banking and mortgage). He has previously worked in Fortune 500 companies in growing their portfolio and economic footprint.

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