Monday – February 20, 2023 – Presidents Day

from “Discipline Equals Freedom” by Jocko Willink

Your life is EVERY DAY.
This isn’t a part-time gig!

This isn’t punch the clock and go home for the day.

You don’t get weekends off.


Here there’s no such thing as the weekend. Your life is an everyday gig:  Every day is Monday.

and you might not like that.  Me?  I love it.

To me, every day is a beginning.  A New Day.  A new week.  A new shot at life

An opportunity to come out of the gate like a man possessed and attack the day: Without Mercy.

Today: I’m taking scalps.

I’m putting the pressure on.

I’m the aggressor. I’m on the attack. and of course:  I will get tired.

I will get beat up. I will get knocked down and drained. and I will have some bad days.

But I








from “Discipline Equals Freedom” by Jocko Willink

Tuesday – February 21, 2023

And the hits just keep on a coming. MBS down 48 bps on the open. 10yT up 5 bps.

Pretty clear the market has moved to a whole new pricing philosophy.

Heading into the 3 day weekend, we knew there was a risk that Friday’s rally was driven by position squaring (i.e. traders buying bonds in order to cover short positions).  Heading into the new week, new short positions are back in fashion. From a data standpoint, a series of stronger Eurozone services PMIs pushed EU yields quickly higher overnight, greatly adding to the selling pressure.

MBS and blowing through floors at a startling clip. 4 floors in the last 5 trading days.

Markit Services PMI:  50.5 vs 47.2 f’cast 46.8 prev

Investor purchases of U.S. homes fell by 45.8 percent on a year-over-year basis, with the largest declines occurring in pandemic boomtowns such as Las Vegas and Phoenix

Almost the entire month of February has been a mad dash from the lowest rates in months to the highest rates in months.  The whole ordeal can be traced back to several key economic reports with mid-tier reports occasionally piling on.  Today saw a surprisingly large reaction to mid-tier data (S&P/Markit PMI). The only way to reconcile the disproportionate reaction would be to add some extra overseas selling from the holiday closure and the overnight session (which also saw similarly strong PMIs in Europe).

While rent growth has been slowing, it still rose at more than double the pre-pandemic rate. Rental price gains began increasing near the end of 2020 and have risen by about an average of $300 in the past two years. Annual single-family rent growth is projected to slow throughout 2023, but it will likely not decline by enough to wipe out gains from the past two years.

Existing home sales fell 0.7% MOM to a seasonally-adjusted annual pace of 4 million units. This is down 37% compared to a year ago. The median home price came in at $359,000 which is an increase of 1.3% compared to a year ago. Prices rose everywhere except the West.

Inventory increased slightly from 970k to 980k.  Down 15.3% from last year.    2.9 mos supply

But only 626,000 of that is available and NOT under contract.

FTHB are 31% of sales.  Cash Buyers are 29%

Wednesday – February 22, 2023

UMBS woke up on the positive side of the bed – for once. 5.5 coupon is up 17 bps on the day.

Bonds began the overnight session with a small, friendly correction in Asia. European trading brought 2-way volatility with a modest rally at first, then a move up to even higher yields than yesterday before a gradual rally heading into domestic hours.

Investors are waking up to a stark realization that the Fed’s work is not done, and that interest rates may have to be hiked even higher to cool hot inflation

In 22Q4, for the first time since at least 1974 when data became available, the quarterly number of housing units built-for-rent at 133,000 exceeded the number of single-family units built-for-sale at 126,000. Historically, the only times these numbers came close were during the recessions of 1982 and 2008/09 when single-family production collapsed. Single-family built-for-sales starts are down about 40% from their recent peaks, built-for-rent activity is nearing its 1986 high.

Federal Reserve officials continued to anticipate further increases in borrowing costs would be

necessary to bring inflation down to their 2% target when they met earlier this month, though almost all supported a step down in the pace of hikes.

“Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time,” according to the minutes of the Jan. 31-Feb. 1 gathering released in Washington on Wednesday.

The minutes also said “almost all” officials agreed it was appropriate to raise interest rates by 25 basis points at the meeting, while “a few” favored or could have supported a bigger 50 basis-point hike.

Results released yesterday show a recent four-day workweek trial in the UK had 56 of 61 participating companies continuing with the policy. The study, conducted from June to December, included 2,900 employees from a range of industries, with the average workweek around 32 hours and compensation kept the same.

The results showed 71% of employees reported less burnout, 39% less stress, and 60% better work-life balance. Fewer workers quit or took sick days compared to the same period in the previous year. Among the 23 companies that shared sales numbers, the average revenue grew 1.4% during the trial.

In the US, legislators in Maryland this week proposed a five-year, four-day workweek pilot program in exchange for tax credits for participating businesses.

Thursday – February 23, 2023

Wow, green numbers 2 days in a row. We are going to get spoiled

MBS up 13 bps on the open. Improved 8 while writing morning post

Bonds were modestly weaker overnight, but had held inside yesterday’s range. Jobless Claims coming under 200k certainly doesn’t help, but it is likely the inflation implications courtesy of the PCE component (of the GDP data) that had the bigger impact.

Jobless Claims = 192 vs 200 f’cast [195 prev]

GDP rose 3.2% at an annual rate in prior quarter, BEA said

GDP Core PCE Price Index = +4.3 vs 3.9 f’cast/prev

Personal consumption rose 1.4% in 4Q after rising 2.3% prior quarter

Fourth quarter GDP rose 2.7%, in the second revision. Third quarter growth was revised upward to 3.2%. Growth was driven primarily by inventory growth. Services spending rose, driven by housing and health care. Government spending was revised upward as well. Personal consumption expenditures were revised downward from 2% to 1.4%. The PCE price index was also revised upward by 0.5% to 3.7%. Excluding food and energy, the index rose 0.4% to 4.3%.

Needless to say, not good news on the inflation front, however we are talking about data that was far in the past at this point. The FOMC minutes shed some further light on the comments from Loretta Mester and James Bullard last week. “A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. The participants favoring a 50 basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way.”

Several analytical financial models say that Fed Funds should be at 8% if you want to kill inflation.

The total value of US residential real estate fell by 4.9% (or about $2.3 trillion) from its June peak, according to data from Redfin.

Luxury homebuilder Toll Brothers announced earnings after the close yesterday. Earnings per share rose, while revenues were up 4%. The cancellation rate was surprisingly low at only 14%. Gross margins rose, so there is no evidence of price-cutting or promotional activity in the luxury home space. Via Brent Nyitray

At the end of 2022, 9.3% of subprime borrowers, those with FICO scores below 660, were 30 days or more behind on their car payments. This is the highest rate since 2010. In addition to being squeezed financially, it’s partly because used car prices are falling, and when used car prices peaked some dealers sold vehicles that were in very bad condition, making nonpayment financially very advantageous and appealing.  Via

More pain in the commercial real estate sector (particularly office buildings): Columbia Property Trust (owned by PIMCO) defaulted on $1.8 billion in mortgage notes on office buildings in New York City, Boston, and San Francisco. We are also seeing defaults on mortgages for shopping malls. The commercial real estate sector’s pain is being driven by rising short term rates (anyone who has floating rates is feeling the pain) and also a sea-change in office work. Note that S.L. Green keeps hitting new occupancy lows.

Wells Fargo laid off hundreds of mortgage bankers this week.


Friday – February 24, 2023

Sorry everyone – I think I jinxed us. After 2 days of being sarcastic about opening to gains – we are opening to a loss in about the amount of both gains. My bad.

MBS down 36 bps on the open.

Other than divine retribution – Bonds were a tad stronger in Asia, but lost ground steadily in Europe to open the US session a few bps higher. The first move was into even weaker territory at first, but with some hints of ground-holding. The ground-holding could merely be a mini wave of short covering before more selling, so we’re not assuming resilience remains, but it’s better than a sharp stick in the eye for now.

Fed Fave

Core PCE Prices m/m= 0.6 vs 0.4 f’cast [0.4 prev]

Core PCE Prices y/y= 4.7 vs 4.3 f’cast [4.6 prev]

prev month revised up 0.2

Personal spending, after adjusting for changes in prices, jumped 1.1%, rebounding from weakness at the end of last year.

It was also the highest reading since June of 2022.

The March Fed Funds futures are now handicapping a 1-in-3 chance for a 50 basis point hike at the March meeting. Note that we will not get the February PCE numbers until after the March meeting, but we will get another look at CPI / PPI.

New Home Sales rose 7.4% MOM to a seasonally-adjusted annual rate of 670,000. This is still down 19% on a year-over-year basis. The median home price was flat on a year-over-year basis to $427,500. The average price fell 5.3% on a YOY basis.

The personal income and outlay number above were confirmed by the University of Michigan Consumer Sentiment Survey. Consumer sentiment rebounded strongly in January, both on a month-over-month basis and an annual basis.

Soft landing? Hard landing? Now there is talk of expecting a “no landing” for the global economy, in which economic growth holds steady and inflation remains high. This scenario would result in tight financial conditions for longer and could weigh on government debt and risk assets. Economists surveyed by Bloomberg expect the Federal Reserve’s peak interest rate to be higher than what had been projected, after recent data showed inflation had remained high. The economists expect policymakers to raise the federal funds rate to a peak of 5.25 percent and hold it there through year-end.  Via

PCE Inflation data has been relegated to an “occasional and modest” market mover in the current environment.  Traders have been doing whatever they need to do in response to the comparable CPI data that comes out much earlier in any given month.  But exceptions are made for PCE data that sings a decidedly different tune, such as today’s.  It matched a decades-high reading at the core level (month-over-month) and thus sent yields higher.  Despite the unpleasant motivation and the 10yr almost hitting 4.0%, things definitely could have been worse.  If traders were determined to squeeze rates highs as fast as possible, it didn’t show up in today’s fairly moderate selling pressure (not to mention the afternoon recovery).

With 23Q1 earnings season almost over, it appears net profits for S&P 500 firms will be 11.3%. While this would be the sixth straight quarterly decline, and well down from their 21Q2 13% peak, it returns profits to where they were in CY2019. Despite higher sale prices, elevated labor, materials, and energy costs are being felt. Lower profits could lead to reduced corporate investment, lower investor payouts, and layoffs.


Common Sources and influences






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