6/28/24 – Biden’s performance pushes yield curve steeper

Earlier this week, the Federal Housing Finance Authority, the government regulator for Fannie Mae and Freddie Mac authorized Freddie to buy second mortgages.  The intent of the agency is to make it cheaper for homeowners to tap home equity without refinancing their existing mortgage and thereby preserving the low-rate mortgages originated prior to the run up in rates.  The program is an 18-month trial with Freddie authorized to buy up to $2.5 billion second mortgages.  The purchases will be limited to second mortgages of $78,277 or less.  Critics say that the program will be inflationary, which if it was done on a larger magnitude we would agree with, but with a $2.5 billion program cap, we doubt that will come to pass.  On the other hand, it could be a slippery slope to a wider program and another government handout.

On Thursday, the Bureau of Economic Analysis (BEA) issued the third and final look at GDP growth for Q1 2024 and it was revised slightly higher, coming at 1.4% versus the 1.3% reported last month.  The personal consumption component was revised meaningfully lower though.  Last month the second look was revised to 2.0% from the initially estimated 2.5%.  The final measure was revised still lower to 1.5% reflecting what, anecdotally, has felt like a drop in consumer demand.  Weakening economic growth could be found in most of the economic data released this week.  Consumer confidence came in lower as did new home sales.  Ironically, the bond market sold off on the morning of the abysmal miss in new home sales.  The actual number of new homes sold annually was 14,000 below expectations, but the previous number was revised 64,000 higher to 698,000, perplexing economists and offering a glimmer of hope to the beleaguered industry.

This morning the BEA announced that the personal consumption price index was unchanged from last month’s level.  That’s welcome news and likely to revive chatter of a rate cut later this year.  The University of Michigan surveys were also a positive surprise with the current condition and expectations indices both moving a touch higher, while the 1-year inflation expectation ticked down to 3.0% from 3.2% last month.

The economic data steepened the yield curve with the 2-year note closing the week 4 basis points lower and the 30-year bond nearly 9 basis points higher, shrinking the yield curve inversion by 13 basis points to -22 basis points.

Next week is a busy one for economic data with the highlight being the monthly employment report.  Following last month’s upside surprise, economist have again penciled in 188,000 new jobs created during June, with the unemployment rate unchanged at 4.0%.  Despite the slew of economic data, trading may be subdued as the week is interrupted by the Independence Day holiday.