Monday – January 23, 2023

UMBS 5.5 is off 23 bps early.

“Supply” is the theme of the day/week so far with bonds drifting weaker in the overnight session as European supply pushed EU yields higher. Now in the first hour of domestic trading, a slew of new corporate bond announcements is putting additional upward pressure on yields

The Index of US Leading Economic Indicators declined again in December, following a decline in November. The US LEI fell sharply again in December—continuing to signal recession for the US economy in the near term. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023. Basically the labor market and consumption are the only things holding up the economy at the moment.

The Fed Funds futures are a lock for 25 basis points next week. A 25 basis point hike would put the Fed Funds target rate at 4.5%-4.75%, and the March futures see another 25 which would put us at 4.75% – 5%. The May and June futures see a 33% chance for another 25, and that probability gradually fades as we round out the year.

The street estimate for Q4 GDP is 2.7%, which is pretty robust, but the Atlanta Fed’s GDP Now estimate is for 3.5%. Both numbers seem high given some the ISM numbers showing contraction in manufacturing and services. Maybe some of this is inventory build which will have the effect of “borrowing” growth from Q1.

New LLPA matrices coming soon!!

The below chart gives a great representation of the changes:

The  cash out change grid is  

Bonds responded to a glut of corporate bond issuance in the morning.  Higher oil prices and the looming Treasury auction cycle may have added to defensive trading strategies, but trading was so light that we’re not keen to read too much into it–especially when yields stayed perfectly mid-range.

40% of LO’s haven’t renewed their license. 


Tuesday – January 24, 2023

MBS 5.5 down 16 bps to start the day.

Bonds had a mixed overnight session, holding flat in Asia, rallying into European hours, then selling back to unchanged after EU PMI data came out slightly stronger.

The opening few minutes of domestic trading saw a brief stint of buying (right at the 8:20am CME Open), but those gains were quickly erased after the Philly Fed data

Jan. Philadelphia Fed Non-Manufacturing Index Rose to -6.5 . This gauge of regional business activity was -12.8 in Dec. New orders rose to 10.8 vs -2.1. Inventories rose to 6.5 vs -2.6

The private sector continues to contract, according to the Flash PMI Index.  “The US economy has started 2023 on a disappointingly soft note, with business activity contracting sharply again in January. Although moderating compared to December, the rate of decline is among the steepest seen since the

global financial crisis, reflecting falling activity across both manufacturing and services. The worry is that, not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which

could encourage a further aggressive tightening of Fed policy despite rising recession risks.”

About 13% of adults are planning on buying a home, a decrease from 15% in the third quarter of 2022, according to research from the National Association of Home Builders. Respondents are more interested in buying an existing home than a new one.

Yield Curve remains SUPER inverted

Bonds took several opportunities to react to econ reports that don’t typically merit much of a reaction today.  We saw similar behavior early in January and it made good sense in a time where markets are extra hungry for every tidbit of economic guidance.  After all, everyone is waiting to see if inflation is really defeated and how soft the landing might be from the Fed’s inflation fighting efforts.  Buyers were ultimately ready to buy as soon as data-driven selling pushed yields back to yesterday’s highs.

Loans in forbearance were flat at 0.7%, according to the MBA. Fannie and Freddie loans were 0.31%, while Ginnie loans were 1.45%.


Wednesday – January 25, 2023

MBS 5.5 up 6 bps early. Not much, but on the good side of things for once.

Bonds were flat to slightly weaker in Asia, but rallied with European bonds after 3am on a combination of economic and inflation data. In the 8am-830am time frame, there was some new selling pressure after several comments from an ECB official.

After that, a handful of corporate bond announcements contributed to a bit more weakness. US equity futures slumped on Wednesday, as recent earnings reports from the likes of Microsoft Corp. fanned concerns about the health of corporate America and investors grew wary that Berlin’s decision to approve the re-export of German-made tanks would provoke an escalation in the Ukraine war.

In terms of economic data, mortgage applications were +7% week over week. Lower rates helped boost the refinance activity by 15%.

Today’s only discernible intraday movement followed comments from the Bank of Canada’s governor regarding the “conditional” nature of their rate hike pause.  Even then, the move was mild and bonds quickly recovered.  A strong 5yr Treasury auction helped reinforce the recovery.

We are seeing the financials increase provisions for credit losses. Capital One provisioned $2.4 billion, which was a big increase from $1.9 in Q3 and $388 million a year ago. Given Capital One’s credit card exposure this is a warning that the consumer might be facing some trouble.

In other consumer banking results, we saw increases in provisions from Ally and Synchrony as well. For Ally, provisions are back towards pre-pandemic levels.

One bank that bucked the trend was Western Alliance, which provisioned only $3.1 million in credit losses in Q4 compared to $28.5 million in Q3. Asset quality remains robust, and charge-offs are low. Given that Western Alliance has some hefty exposure to the mortgage industry, this result is encouraging.

Homebuilder D.R. Horton announced earnings this morning that missed Street expectations, as earnings fell 13%. Revenues were slightly positive. Net sales orders fell 38% and the cancellation rate rose to 27%. Backlog fell 46%.


Thursday – January 26, 2023

MBS down 6 bps on the open.

Bonds were already moderately weaker overnight after following choppy selling in Europe. This econ data is not helping for obvious reasons (strong economic data = bad for bonds, and all 3 reports were stronger than expected).

GDP = 2.9 vs 2.6 f’cast, [3.2 prev]

Consumption rose 2.1%, while investment increased 1.4% and government spending rose 3.7%. Inventory build particularly in the natural resource sector was a driver of the increased GDP print. Housing services (i.e. home price appreciation and owners equivalent rent) pushed up GDP while actual residential construction was a drag. The housing services component will fade into the background as home price appreciation stagnates.

Jobless Claims= 186 vs 205 f’cast, [192 prev]

Durable Goods = 5.6 vs 2.5 f’cast, [-1.7 prev]

Core Durable Goods = -0.2 vs -0.2 f’cast, [0.0 prev]

The US economy expanded at a healthy pace in the fourth quarter, though signs of slowing underlying demand mounted as the steepest interest-rate hikes in decades threaten growth this year. Personal consumption, the biggest part of the economy, climbed at a below-forecast 2.1% pace.

The PCE price index (the Fed’s preferred measure of inflation) rose 3.2% compared to 4.8% in the prior quarter. Excluding food and energy, the price index rose 3.9% versus 4.7%.

New home sales rose 2.3% MOM to a seasonally-adjusted annual pace of 616,000 last month, according to the Census Bureau. This is down 26.6% on a year-over-year basis. For the year, an estimated 644,000 homes were sold in 2022, which was a 16.4% decline from 2021. There were 461,000 homes for sale at the end of December, which represents a 9 month supply. Generally speaking 6 months is considered a balanced market, so the builders have inventory to go.

Thursday morning’s economic data provided one of only two major opportunities for this week’s scheduled events to ruffle the bond market’s feathers.  Despite a trifecta of stronger numbers (Claims, GDP, Durable Goods), bonds were right back to pre-data levels in less than an hour.  Granted, we closed slightly weaker, but most of that weakness was in place at the open.  This places all the more focus on next week’s events which include both ISM reports, NFP, and central bank announcements from the Fed, Bank of England, and the ECB.

Goldman Sachs sees a 2008-style decline in 4 major cities, including Phoenix, San Jose, San Diego and Austin, TX. The bank sees declines of around 25% for these MSAs. Note that such a decline would still put them above pre-pandemic levels given the insane appreciation we saw there over the past two years.


Friday – January 27, 2023

MBS pretty flat at -5 bps on the open. Bonds were slightly weaker overnight with more of the losses seen during Asian market hours for a change (European hours have accounted for most of this week’s overnight movement).

Monthly Core PCE= 0.3 vs 0.3 f’cast [0.2 prev]

Annual Core PCE= 4.4 vs 4.4 f’cast [4.7 prev]

Incomes = 0.2 vs 0.2 f’cast Spending = -0.2 vs -0.1 f’cast

The year over year change of 4.4% was the smallest rise since October 2021. Even though there is decline and inflation seems to be falling, inflation will likely remain above the Fed’s target this year, which means they’ll most likely remain dedicated to a target rate near 5%.

The goods inflation and supply chain issues seem to be in the past – remember the big chip shortage? Intel is swimming in excess inventory. Commodities like lumber are back at pre-pandemic levels. Housing inflation will stop bumping up the inflation numbers during the summer. The final leg is incomes, which have been falling for 3 months. The Fed seems to have gotten a hold of inflation and its work is largely done. Does that mean prices will return to pre-pandemic levels? No. The inflation of the past year means that prices have hit a new, higher plateau.

Pending Home sales rose 2.5% in December, after six straight months of declines. Year-over-year, transactions are still down by a whopping 33.8%. That said, it looks like the nuclear winter in housing is over.

The two reports most capable of surprising the market this week were Thursday’s GDP and Friday’s PCE.  While it’s always good to maintain some respect for potential surprises, weren’t looking for any major revelations in terms of the market’s reaction.  By some combination of their 2nd tier nature and the fact that they came in close to consensus, these reports caused no regret for those who hit the snooze button on this week’s volatility risk.

In short, this week has been every bit the snooze-fest we suspected it might be.

Common Sources and influences






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