Monday – January 2, 2023
Tuesday – January 3, 2023
European bond markets rallied yesterday and again in the overnight session. Reports are showing that European inflation is moderating. This resulted in our Euro gains today. Treasuries weren’t in the office to follow the first leg of that rally, but they did open stronger today. UMBS are up 42 bps early and 10y is down 9
Investors, still reeling from a spell of wonky predictions, are expecting a volatile year of trading. Fed policy will
dictate how stocks and bonds perform, with some traders already seeking out opportunities resulting from risk assets getting sold off.
Recession concerns also continue to linger as investors ponder whether Fed tightening will push the US economy to a hard or soft landing. All eyes will be on the jobs report this week, as softening in the labor market remains the Fed’s focus.
Given that Jerome Powell’s focus has been the surprisingly strong jobs report, I could see a situation where bad news is good news – i.e. a weak report would trigger a rally in stocks and bond as it would increase the chances that the Fed will pivot from a tight monetary policy to a neutral one.
Jerome Powell discussed the three basic inputs to inflation. First, there are the supply chain issues, which manifested themselves early on in the pandemic. Second, there is housing which had its biggest impact beginning in 2022. Finally, there is services ex-housing, which basically means service sector wage growth. The supply chain issues have largely been fixed, and housing will probably fade by summer. The final component – services ex housing – is the focus of the Fed. Which means any negative news in the labor market will perversely be positive for the markets.
Manufacturing exhibited the fastest decline since May of 2020, according to the S&P Global Purchasing Managers Index. Sinking demand for inputs and greater availability of materials at suppliers led to a further easing of inflationary pressures. In fact, the rate of input price inflation fell below the series trend. Selling price hikes also eased, albeit still rising steeply.
Also got a recession warning from IMF head Kirstalina Georgieva. Expects 1/3 of the world’s economies to go into recession.
Oil is about $80/barrel – though that is with low China demand. Will change if/when they reopen.
One major source of tradeflows was hefty slate of new corporate bond issuance. This is normally a headwind that pushes rates higher. The same is true for the large block trade that hit around 10:30am ET. While both of these headwinds exerted their expected forces, bonds nonetheless scratched out moderate gains to begin the new year.
Wednesday – January 4, 2023
Overnight bonds moved gradually lower as volume is coming back. Lower French inflation kicked off the rally in Europe. On the heels of German improvement yesterday. Also, US futures advanced with stocks as positive reports from China and data from Europe boosted risk appetite.
With inflation peaking at 9.1% in June and sliding since, a recession is now the #1 economic concern going into 2023. Of course, a) the “experts” have been talking about a recession for over a year, and b) recessions lead to lower rates. When businesses make less money due to lower consumer spending (triggered by dwindling reserves, price pressures, and an aggressive Fed), companies lay off workers and more people are hesitant to spend. Weak expectations or prior over-investing also factor into the equation, with many firms feeling that large swaths of the economy could, or are already, experiencing worsening macro forces and a series of unknown variables (war, pandemic, energy prices, etc.).
There are signs that the three big world economies (U.S., EU, and China) are all slowing down simultaneously. Even countries that are not in recession, it would feel like recession for hundreds of millions of people. But the argument against a major recession is strong. Gross Domestic Product is not negative. Many corporations haven’t cut their profit forecasts, hiring remains surprisingly robust, and the unemployment rate is sitting near historical lows at 3.7 percent. If that resilience holds up and inflation continues to cool down, a soft landing could be in the making. The Fed also won’t hike interest rates to the moon (and has even begun to take its foot off the accelerator), which could mean that somewhat of a slowdown is in store, but not one that slams the brakes on the economy. And the rise in real income is likely to be the stronger force in 2023 along with supply chains being normal.
he manufacturing economy contracted in December, according to the ISM Manufacturing Index. The index came in at 48.4, the lowest since the early days of the pandemic. If the index comes in above 50, it is expanding, while below it is contracting. The prices index fell to 39.4, which is good news on the inflation front, while employment remained in expansion territory.
Job openings were more or less unchanged in November, according to the JOLTS job openings report. The quits rate (which tends to predict wage increases) ticked up as well.
A few of the more important bullet points from the Fed Minutes:
- FED MINUTES: PARTICIPANTS WELCOMED INFLATION DROPS IN OCTOBER, NOVEMBER BUT CONCURRED IT WOULD TAKE ‘SUBSTANTIALLY MORE EVIDENCE’ OF PROGRESS TO BE CONFIDENT OF A SUSTAINED DOWNWARD PATH
- FED MINUTES: NO PARTICIPANTS ANTICIPATED THAT RATE CUTS WOULD BE APPROPRIATE IN 2023
This was the most forceful language we’ve heard regarding the “are we there yet?” song and dance with respect to how many good inflation reports it takes to change the narrative. Even Powell himself had previously said 2 consecutive reports opens the conversation. That’s not necessarily at odds with the Minutes here, but it’s a different takeaway for markets, to be sure.
On the topic of “no cuts in 2023,” the market disagrees, but this is par for the course as far as the Fed’s communications have been concerned.
During 2022, the Dow slipped 8.8%, the S&P 500 fell 19.4%, and the Nasdaq tumbled 33.1%. Among the 11 sectors in the S&P 500, energy gained a stunning 59% in 2022; no other sectors rose, although some came close. Utilities only fell 1%, consumer staples (think Campbell’s soup) eased 3%, healthcare dropped 4%, and industrials shed 7%. The other six sectors fell over 10%, led by communications, down 40%. Via econ70.com
Thursday – January 5, 2023
UMBS down .41 on the open. The big bad actor this morning is the stronger ADP employment report. Traders continue to wait for evidence of increased slack in labor markets and the data continues pointing in the opposite direction.
ADP Employment= 235k vs 150k f’cast [127k prev]
Small – Medium businesses added 200k jobs, while large ones shed 150k. Also showed that wage gains were +7.3% for job stayers and 15.2% for job changers. Both up slightly.
Jobless Claims= 204k vs 224k f’cast [223k prev]
Trade Gap= -61.5bln vs -73.0 bln f’cast [-77.85bln prev]
Pricing in the market still shows that investors continue to bet that the Fed will start cutting rates before the end of this year. Yes, there is some data pointing at slowing economic activity in the US, but the jobs market – which is closely watched by the Fed – remains surprisingly tight.
Market still digesting Fed minutes from yesterday. They showed the Fed is focused on wage growth. They need it to go down, even though they previously did everything to strengthen them. And Fed members are making things worse by saying dumb things. Apartment list reported that rents fell .8% in December, and now up only 3.8% YoY. Significant deceleration
Fed futures now reflecting a much stronger belief that the Fed will keep raising rates until hitting 5.0% in May rather than stopping at 4.75% in March that was expected yesterday and earlier. This shift will put some pressure on mortgage rates, not necessarily driving them up much higher from here but reducing the chances of seeing rates drop back down to the lows of the middle of December.
We began 2023 with some huge news from one of the largest mortgage lenders working with mortgage brokers. Rocket Pro TPO Executive Vice President Austin Niemiec has been promoted to Chief Revenue Officer of Rocket Mortgage. Mike Fawaz is stepping in to lead Rocket Pro TPO as Executive Vice President.
Rocket Pro TPO released “Purchase Plus,” a credit program that offers up to $7,500 in lender credits for first-time buyers in underserved communities to eliminate a significant hurdle to homeownership. Click here and/or reach out to your AE for more details! Rocket is also giving brokers a 37.5 bps credit on 30-year conventional purchase loans $200K or less – now through Sunday, February 5!
UWM has notified brokers about its credit reports being $37.35.
Housing inventory is rising more rapidly the costlier the home. For high end housing, inventory is up from 2 months 2/22 to 6 months in 11/22. For median priced homes, inventory is up from 1 month to 4, for affordable housing it’s risen from 1 to 2.5, and for very low-priced housing it’s increased from 1 to almost 2. It may be a buyer’s market for high priced housing soon. Via econ70.com
Friday – January 6, 2023
UMBS up .25 early. There are definitely “offsetting penalties” on this play with job creation and the unemployment rate continuing to make a case for a tight labor market. Fighting for the side of good, we have slower wage growth–something the Fed has called out as specifically necessary in order to “believe” in the potential for a true inflation correction.
Nonfarm Payrolls= 223k vs 200k f’cast [256k prev]
o Oct and Nov revised down 28k
o Of the 717k jobs created in the household survey, 679k were part-time. Which lead to wage growth shrinkage
Unemployment Rate = 3.5 vs 3.7 f’cast [3.6 prev]
Wage growth 0.3 vs 0.4 f’cast
o last month revised down to 0.4 from 0.6
The part that caught the market’s attention was the change in average hourly earnings, which came in lower than expected. The Street was looking for a 0.4% MOM increase and got 0.3%. The YOY increase came in at 4.6% versus the 5.1% forecast.
Rising wages is the biggest concern of the Fed as it is trying to avoid the wage-price spiral which was a big contributor to 1970s inflation (amongst other things). Where would the Fed like to see wage growth? That is a harder guess. If wage growth falls to 2%, where the Fed would like to see inflation, there is no real wage growth and that is probably too low. My guess is that the 3.5% or so would be the Goldilocks scenario, provided that inflation falls back to the 2% target. A big component of this will be productivity growth, which has been muted. Via Brett Nyitray
We had some Fed “speak” yesterday. Kansas City Fed President George says she sees rates reaching 5.0 percent and staying there “well into 2024.” St. Louis Fed President Bullard suggested 2023 might be a disinflationary year. He added that “While the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer.”Fed’s Bostic tried to tell markets that more hikes were coming and no cuts until “well into 2024,” but markets weren’t having any of that.
ISM Services = 49.6 vs 55.0 f’cast [56.5 prev]
ISM new orders = 45.2 vs 56.0 prev
This is a stunningly huge miss for this data series. ISM Services is a highly regarded report and centered on a sector that has been the focus of most of the Fed’s attention when it comes to inflation and economic growth
Home sellers gave concessions to buyers in 41.9% of home sales in the fourth quarter, the highest share of any three-month period in Redfin‘s records, according to a report from the technology-powered real estate brokerage. A record 22% of home sales in the fourth quarter included both a concession and a final sale price below the listing price.
Common Sources and influences
- Brian Levy
- Daily NMP from ambizmedia
- The National Real Estate Post
- George Meillarec @ Loop Capital (often via Bloomberg)
- Bank of Oklahoma MBS traders, Chris Maloney
- MCT Daily Market Commentary