C’mon!  UMBS are down 18 bps on the open – again!

The selloff on Wall Street showed signs of abating even as investors grappled with the threat of higher-for-longer interest rates and an Israeli counter-strike.

US equity futures ticked higher, signaling a recovery after the S&P 500 fell more than 1% in the past two sessions.

Economic data continues to underscores US economic strength while conflict in the Mideast fans the risk of higher energy prices and inflation, frustrating hopes for imminent Federal Reserve interest rate cuts.

Industrial Production = 0.4 vs 0.4 f’cast

Last month revised up to 0.4 from 0.1

Industrial production isn’t one of the reports typically considered to be reliable market movers.  We can’t really confirm that it’s responsible for this most recent leg of selling but volume and weakness picked up a few minutes later (true reactions to data usually coincide perfectly with the release).

Housing starts came in at 1.32 million in March, which was way below expectations. The number was down 14% month-over-month and 4% year-over-year. Building permits fell 4% MOM and rose 1% YOY to 1.46 million. This will not help alleviate the affordability issue, which is as bad as it was in the 1980s.

Builder sentiment was flat in March, according to the NAHB / Wells Fargo Housing Market Index. High mortgage rates continue to be a headwind for the builders as it is keeping buyers on the sideline, hoping for a decline in borrowing costs.

Note the big builders are helping to alleviate that issue by offering buydowns via their captive mortgage originators. Builders generally pencil in about $40,000 in upgrades for their properties – i.e. things like granite countertops, better appliances etc. For a typical loan, $40k is about 10 points, so you can buy down the rate a lot. Plus it keeps the sales price unchanged which means the comps remain high.

Industrial production rose 0.4% in March, according to the Fed. The latest numbers indicate the manufacturing sector is rebounding after slowing from December through February. On a year-over-year basis production was flat, and generally corresponds to the ISM data along with the Fed surveys.

Morning hours were frustrating for the bond market as we watched yields move to new multi-month highs for no obvious reason.  That said, the notion of a “re-pricing” sell-off doesn’t really require new obvious reasons (because the obvious reasons from the recent past created momentum that isn’t traded all in one go).  If we feel compelled to blame some data, Industrial Production (specifically, the upward revision to last month) is the only game in town). The better bet may be to infer some anxiety ahead of an afternoon speech from Powell confirmed that recent data shows a lack of progress on inflation.  He went so far as to say there’s uncertainty over whether there will even be a rate cut in 2024.  The absence of any major market reaction suggests traders weren’t too surprised.

UMBS closed the day down 25 bps at 99.20.  Lower coupons fared worse.

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