Hi Friends! 

This week marks a pivotal moment for the economy and markets, especially for bonds and anyone involved in housing. While the Federal Reserve is expected to cut rates by 25 basis points with a near 97% certainty, the real focus lies in their updated “Dot Plot” and economic projections. These updates will unveil their outlook on inflation, GDP, unemployment, and the pace of future rate cuts—and any surprises could ripple across the bond and housing markets.

The “Dot Plot” acts as a guide to the Fed’s vision for monetary policy, mapping out where key decision-makers see interest rates in the coming years. It’s a crucial tool for understanding what lies ahead, and this week’s adjustments could signal if the Fed plans to maintain its cautious approach or shift its stance. While some speculate the Fed might pause balance sheet runoff by 2025, the likelihood remains slim, setting the stage for potential volatility.

Here’s what to watch for this week:

Key Data Releases

• Monday: S&P Global Services PMI Data
  This offers insights into service sector activity. If the data points to a slowdown, it could reinforce the Fed’s caution about aggressive rate cuts.

• Tuesday: November Retail Sales Data
  Retail sales highlight consumer spending strength. Strong data could signal robust economic growth, while weaker figures might push the Fed toward more accommodative policies.

• Wednesday: Fed Interest Rate Decision and Projections
  This is the week’s centerpiece. The Fed’s decision, along with updated projections, will dictate market sentiment. Watch closely for changes in their 2025 rate cut outlook and any signals of concern over persistent inflation.

• Thursday: Q3 GDP Data and November Existing Home Sales
  GDP revisions will provide clarity on recent growth trends, while housing data will shed light on buyer behavior amidst affordability challenges.

• Friday: November PCE Inflation Data
  As the Fed’s preferred inflation gauge, PCE numbers are expected to rise to 2.6% YoY (from 2.3%) for headline inflation and 2.9% YoY (from 2.8%) for core inflation. Any upward surprises could unsettle the bond market, as inflationary pressures remain a key concern.

Why It Matters

For bonds, fewer projected rate cuts in 2025 and persistent inflation could push yields higher, adding pressure to the market. Rising yields typically mean higher mortgage rates, which directly impact affordability for homebuyers.

For the housing market, reports on builder confidence, sales, and permits will highlight the challenges of balancing demand and affordability. With inflation climbing, homebuyer activity may remain subdued, keeping the market in a state of flux.

The Bigger Picture: Stagflation Risks
Adding to the complexity, some economists warn of a potential return to stagflation—a rare economic condition marked by slow growth, high unemployment, and rising inflation. Indicators like core CPI holding steady at 3.3% and headline CPI inching back up to 2.7% suggest inflation could reaccelerate, raising the stakes for the Fed’s policy decisions.

If inflation continues to outpace expectations, it may limit the Fed’s ability to cut rates aggressively, keeping mortgage rates elevated in the near term.

By the end of the week, we’ll know so much more about where the economy—and mortgage rates—are headed. As always, the bond market plays a crucial role in determining mortgage rates, so keeping an eye on inflation data and Fed signals will be key.

As always, if you have any questions about the market or real estate, i'm always here to help.