MBS are down another 17 bps on the open. S&P futures down 4.25

In addition to the housing starts data, Canadian inflation came in a bit hotter than expected at the headline level at 8:30am. Even before then, selling pressure in European bonds had been ramping up and stocks had been slumping. None of the individual data points line up with the bigger moments of volume and weakness, but the overall pattern fits one of two narratives: pre-Fed anxiety or a pre-Fed move to the sidelines.

Benchmark Brent crude oil topped $95 a barrel for the first time since November, adding to concerns about inflation. Crude has soared by about a third since mid-June as Saudi Arabia and Russia joined hands to curb supplies and drive a rebound in prices.

Housing Starts = 1.283m vs 1.44m f’cast

Building Permits = 1.543m vs 1.443m f’cast

Building permits increased to 1.54 million which was up 7% MOM and down YOY.

While single-family starts fell, the big story has been the collapse in multi-fam, which has fallen off a cliff recently due to high rates and a glut of new supply already under construction. Shortages remain an issue with skilled construction laborers in short supply, along with buildable lots, transformers, and now insurance.

Some good news on the inflation front: single family rent growth dropped to a 3 year low in July, rising only 3.1%. This is a return to pre-pandemic levels of growth.

“Soft landing” rhetoric is quickly being replaced by “sticky inflation” whispers. The question is now how long rates will stay elevated by the Fed to ensure it has won the inflation battle. Fed fund futures are pricing in three rate cuts by the end of next year, which is quite hopeful in the face of that “sticky” slog back to the Fed’s 2 percent inflation target.

Bonds began the day in moderately weaker territory, mostly following an overnight sell-off in Europe.  Trading levels had recovered enough by 10am that we could consider the overall trend to be “mostly flat.”  In fact, MBS came fairly close to breaking even just before 2pm, but then things went sideways.  Actually, “sideways” is the wrong word.  Prices dropped somewhat abruptly and Treasury yields spiked to new super-long-term highs.  Without any clear scapegoats, we’re forced to rely on explanations filed under the category of pre-Fed jitters.  One would think traders already knew how jittery they were before 2pm today, but sometimes you don’t know until you see how jittery everyone else is.

MBS Closed the day down 25 bps.  At 97.92 we are in the middle of an ugly range with 50 day avg as ceiling at 98.114 and floor of Fibonacci at 97.838