Monday – January 30, 2023

UMBS down 28 bps early.  US equity futures fell on Monday along with stocks in Europe as a note of caution crept in at the start of a week marked by interest-rate decisions and big-name company earnings on both sides of the Atlantic.

Federal Reserve officials are expected to raise rates by a quarter percentage point on Wednesday, dialing back the size of the increase for a second straight meeting, after recent data suggested the central bank’s aggressive campaign to slow inflation is working. Signs of earnings pressure, however, are raising concerns about the health of the economy and the outlook for equities.

Right now there is a tug-of-war going on between markets and the Fed, with markets firmly pricing in a peak fed funds rate of 4.75% and rate cuts starting by November while the Fed is fighting to convince markets that rates will go higher and hold longer. The Fed has to be concerned that if markets start to rally it will bring about more inflation pressure, because of increased economic activity.

The Atlanta Fed’s GDP Now estimate for Q1 is a mere 0.7%. Note that the GDP Now estimate was significantly higher than the first estimate for Q4 GDP growth – about 60 basis points too high.  We also get Jobs on Wed and Friday.  Market looking for +175k

Jeffrey M. Lacker and Charles I. Plosser penned an op-ed in the Wall Street Journal about Fed policy and inflation. They discuss the use of rules like the Taylor Rule which calculate a Fed Funds target rate. Based on the inflation numbers we saw in December, these rules suggest the Fed Funds rate should be 8%.

While we only have two trading sessions left in January, unless agency mortgage bonds suffer from quite the shellacking over the next 48 hours we should see a record positive excess return for the US MBS index for the month. It currently stands at +1.20%, which is far above the +0.01% return seen for the month on average this millennium and the +0.56% record seen in 2009.


Tuesday – January 31, 2023

UMBS up 9 on the day, so far. Down about .25 from high of the day The Employment Cost Index (ECI) is an economic report that was never on our radar as a top tier market mover in the past. Ever since Fed Chair Powell called out this report as a specific source of guidance on potential wage pressures, we’ve seen bigger and bigger reactions.

Employment Costs: 1.0 vs 1.1 f’cast, [1.2 prev]

Q4 wages/salaries: 1.0 vs 1.3 f’cast/prev

MBS instantly lost almost a quarter point at the same time that Treasuries lost ground.  Markets have been dismissing Fed members talking about raising the policy rate above 5% and holding it there through all of 2023, and the big question for this week is – will that change? Expectations are already in place that the Fed will be hawkish, and that Fed Chair Jerome Powell’s press conference will reiterate the message that the Fed will stand strong in its quest for 2% inflation.

House prices fell 0.1% MOM and rose 8.2% YOY according to the FHFA House Price Index.  The West Coast is experiencing the biggest slowdown, followed by the Mountain States. Some of these MSAs like Boise became completely disconnected from the local economy and prices will almost certainly contract to what the local economy can support.

Home prices fell 0.5% MOM according to the Case-Shiller Home Price Index. November 2022 marked the fifth consecutive month of declining home prices in the U.S.   the National Composite Index fell -0.6% for the month, reflecting a -3.6% decline since the market peaked in June 2022. We saw comparable patterns in our 10- and 20-City Composites, both of which stand more than -5.0% below their June peaks. These declines, of course, came after very strong price increases in late 2021 and the first half of 2022. Despite its recent weakness, on a year-over-year basis the National Composite gained 7.7%, which is in the 74th percentile of historical performance levels.

Consumer confidence fell in January, according to the Conference Board.  Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term. Despite that, consumers expect their incomes to remain relatively stable in the months ahead. Meanwhile, purchasing plans for autos and appliances held steady, but fewer consumers are planning to buy a home—new or existing. Consumers’ expectations for inflation ticked up slightly from 6.6 percent to 6.8 percent over the next 12 months, but inflation expectations are still down from its peak of 7.9 percent last seen in June.

The U.S. economy grew 2.9% in 22Q4, down slightly from 3.2% in 22Q3. In 2022, GDP grew 1%, a pleasant surprise given negative growth in 22H1. However, stripping out inventory changes, net trade, and government spending to get at the underlying sustainable growth trend, GDP grew an anemic 0.2% in 22Q4. The labor market remains surprisingly strong, but rate hikes will continue to make themselves increasingly felt as 2023 progresses.

Redfin put out a piece on how the housing market is beginning to recover. Condos and luxury properties are unpopular, but smaller properties that are well-maintained in good school districts are moving quickly. “Buyers are out there, but they’re making low offers and asking for concessions. They don’t seem ultra committed to homes like they used to. If they write an offer and they don’t get exactly what they want, they’re happy walking away.

For all of 2022, UWM transferred $98.8 billion of bulk MSRs, more than any other nonbank.


Wednesday – February 1, 2023

MBS up 9 bps on the open. 10y down 7 bps.

Bonds were almost perfectly flat in Asia, then slightly stronger in Europe. Notably, EU bonds pulled back into negative territory early this morning while US yields remained a bit lower.

The ADP data clearly delivered a jolt of volume and a smaller jolt of directional trading. All in all, the move was worth less than 3bps in 10yr yield terms, but it was in the right direction.

ADP Employment= 106 vs 178 f’cast [253 prev]

Most of the growth came from the hospitality industry which added roughly 95,000 positions.

Job openings and labor turnover survey (JOLTS)=  11.012 vs 10.44 mln prev

Pay growth was 7.3% for job stayers and 15.4% for job changers. Leisure and hospitality saw increases of 10% and was the outlier compared to all the other sectors which were bunched between 6.6% and 7.9%. This is something that will bother the Fed, as “services ex-housing” is their target for inflation reduction. The youngest cohort (ages 16-24) saw the biggest increase as well.

We were pretty sure we knew what Powell would generally say in today’s press conference.  He turned out to be generally predictable.  After all, there are really only two things the Fed can think or say right now: A) still need to see more progress on inflation and B) data will determine when our job is done.  Despite Powell’s unsurprising comments, the market was apparently surprised (or relieved?).  This is surprising considering the simple list of routes in the Fed playbook.  Perhaps it’s as simple as the market being overly prepared for a Hawkish smackdown from Powell and instead getting a logical approach.

The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022. Further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months.

We did get some info on MBS spreads yesterday courtesy of AGNC Investment, a mortgage REIT which announced its fourth quarter results.

Mortgage REITs invest in mortgage backed securities, and they are often the buyer of the Fannie / Freddie securitizations. Think of them as the ultimate “lender” for your production. For the past year, the mortgage REITs have been reporting declines in book value per share as MBS spreads have widened – in other words MBS have fallen in value with interest rates, and the hedges mortgage REITs use have not increased in value enough to make up for the losses. This looks like it finally reversed in the fourth quarter.

This spread increased significantly in 2022, which has exacerbated the increase in mortgage rates from 3.27% to 6.66%.

Thursday – February 2, 2023

MBS up 6 bps. 10yT down 5.

Both the Bank of England (BOE) and European Central Bank (ECB) released policy announcements early this morning. Both were as-expected in terms of rate hikes. The ECB took a somewhat different approach and pre-committed the next rate hike (another 50bps), but said it would re-assess after that. That would be like the Fed saying it knows exactly what the terminal rate is and letting the market know when it was coming.

The ECB also said reinvestments would continue through the end of 2024 and that its balance sheet runoff would be managed to avoid interference with the appropriate monetary policy stance. That’s a very weird and confusing comment since balance sheet runoff IS part of a policy stance. We take it to mean that the ECB wants a smaller balance sheet, but it doesn’t want to cause too much policy tightening in the pursuit of that goal. As such, it may slow the pace of roll-offs if inflation and growth contract enough.

Jobless Claims: 183 vs 200 f’cast [186k prev]

Unit Labor Costs, Q4: 1.1 vs 1.5 f’cast, 2.0 prev

Powell’s comment Wednesday that the “disinflation process has started” suggested that the aggressive tightening cycle is starting to reduce the pace of price growth, even as he warned of a “couple” more hikes to come. Positioning in US swaps markets assumes the Fed is getting closer to cutting rates as traders bet that economic conditions are likely to keep it from the additional rate increases that policy makers still anticipate.

The Fed Funds futures currently see a 85% chance of another 25 basis point hike in March, with 15% handicapping no change in policy. The markets see a 30% chance of another 25 basis point hike at the May meeting. The yield curve continues to invert, with the 2s-10s spread at -71 basis points.

Nonfarm productivity increased 3% in the fourth quarter of 2022, which was above Street expectations. Output increased 3.5% while hours worked rose 0.5%. Unit labor costs rose 1.1% as compensation rose 4.5% and productivity rose 3%.

Pulte Homes announced fourth quarter earnings, with a 20% increase in revenues and a 200 basis point increase in gross margin. The increase in gross margin means that Pulte hasn’t been forced to grant concessions to move the inventory. That said, these Q4 sales were initiated earlier in 2022 before mortgage rates spiked.

Orders were down 41%, which reflects an elevated cancellation rate of 32%. Interestingly, the stock market is looking over the homebuilding valley. The homebuilder ETF (XHB) is up 29% over the past 3 months.

The Biden Administration is planning on releasing a Tenant Bill Of Rights, which has been drafted by community organizers and pro-tenant lawyers. It will attempt to find a way to impose national rent control. Ultimately the problem is that housing is in a dire shortage, and these measures will do nothing to increase supply – if anything expropriation of property rights will cause investors to raise the required rate of return to take into account regulatory risk, which means new investment will get harder, not easier.


Friday – February 3, 2023

UMBS down 30 bps on the day. Non-Farm Payrolls crushed the market today

NFP = 517k vs 185k f’cast [260k prev]

unemployment = 3.4 vs 3.6 f’cast [3.5 prev]

earnings = 0.3 vs 0.3 f’cast [0.4 prev]

Also 71k in positive revisions to Nov and Dec

We don’t have explanations yet or even the ability to comprehend a beat of this size in juxtaposition with the month’s other labor related data. We do know bonds are selling and that the bewilderment is evident in the restraint of the sell-off.

On a deeper dive, of the 894k job creations, 606k were part-time.

Avg Hourly Earnings were up .3% in Jan (4.4% YoY)

Avg Weekly Earnings were up 1.2% in Jan (4.7% YoY)

Remember, ADP came in at +106k.  So a big disconnect here.

ISM Non Manufacturing = 55.2 vs 50.4 f’cast [49.2 prev]

Coming into the week, yields were near the top of a narrow range (3.4-3.56 give or take).  With both ISM reports, the jobs report, and policy announcements from the Fed/ECB/BOE, it was a distinct possibility that we’d see that range broken.  By Thursday morning, that looked like it was a work in progress, but by the end of the day, yields were back to 3.40.

Then in a cruel twist of fate this morning, NFP beat forecasts by the widest margin in a year and half.  90 minutes later, ISM crushed its forecasts as well.  These events combined to push yields right up to the top of the range, leaving us to hurry up and wait for the next set of potential market movers.

Common Sources and influences






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