UMBS were up 16 bps on the morning.

Bonds were sideways to slightly stronger in the overnight session, with no noticeable follow-through to yesterday’s CPI reaction.

This morning’s producer price index (PPI) is not a top tier market mover, but in this environment of high inflation sensitivity, it can have an impact of it’s far enough from forecast.  Today’s result qualifies, albeit just barely.

Core PPI m/m = 0.0 vs 0.2 f’cast

Final demand rose 0.9% y/y; est. up 1%

Final demand ex food, energy unchanged m/m: est. up 0.2%

  • Final demand ex food, energy rose 2% y/y vs est. up 2.2%

As expected, 2pm has been all about the Fed’s dot plot with investors hoping to see recent shifts in rhetoric reflected on paper.  That is exactly what happened with a 0.5% reduction in the 2024 rate outlook, effectively reversing the dot plot change from September.

2024 Dots

  • 4.6% vs 5.1% prev
  • this is all that really matters…

2025 dots

  • 3.6% vs 3.9% prev

BFW 12/13 19:00 *FED HOLDS BENCHMARK RATE IN 5.25%-5.5% TARGET RANGE

BFW 12/13 19:00 *FOMC MEDIAN FORECAST SHOWS 75 BPS OF RATE CUTS IN 2024 TO 4.6%

BFW 12/13 19:00 *FED SAYS INFLATION ‘EASED’ OVER PAST YEAR BUT REMAINS ELEVATED

BN 12/13 19:00 *FOMC RATE FORECASTS SHOW WIDE RANGE OF PROJECTIONS FOR 2024

BN 12/13 19:00 *FOMC MEDIAN FORECAST SHOWS RATES AT 3.6% IN ’25, 2.9% IN ’26

BN 12/13 19:00 *FED SAYS FOMC VOTE UNANIMOUS

BN 12/13 19:00 *FED HOLDS IOR AT 5.4%, DISCOUNT RATE AT 5.5%

BN 12/13 19:00 *FED WILL CONTINUE SAME PACE OF REDUCING TREASURY, MBS HOLDINGS

It may have seemed that we were paying too much attention to today’s dot plot on the approach, but hindsight suggests it could not have been overdone.  Rates plummeted as the dots revealed that September’s big revision was completely erased (in Sept, Fed members priced in 50bps of “higher for longer in 2024”).  After the dots, some market watchers worried that Powell would push back on the rally in order to temper the volatility.  He did not.  He simply said the same things he’s been saying.  Hikes are likely done unless data manages to surprise in an inflationary way.  Bonds rejoice across the curve

UMBS ended the day up 61 bps on the 6.0%.   36 bps on the 6.5%.   Up 95 bps on the 5.5%

Luxury homebuilder Toll Brothers reported better-than-expected earnings, with gross margins coming in higher than guidance. Toll is seeing strong demand, although average selling prices are declining which is due to product mix. Toll is raising prices on an apples-to-apples

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