Monday – January 16, 2023


Tuesday – January 17, 2023

MBS down .25 on the open.  Stocks and bond futures lost ground in overseas trading during yesterday’s market holiday and have been mostly flat since then.  There isn’t a single, obvious motivation for the weakness, but if someone had to pick a focus, it would likely be speculation over the upcoming policy announcement from the Bank of Japan given that the previous announcement was more significant than normal.

A measure of New York state manufacturing activity plummeted in January the lowest level since the early months of the pandemic as new orders and shipments collapsed. New orders dropped nearly 28 points to minus 31.1, also the lowest since May 2020

The Federal Reserve Bank of New York’s general business conditions index decreased nearly 22 points to minus 32.9 this month, data showed Tuesday. A reading below zero indicates contraction. The figure was more than twice as weak as the most pessimistic estimate in a Bloomberg survey of economists.

On Friday we got

Consumer Sentiment = 64.6 vs 60.5 f’cast, 59.7 prev

1yr inflation expectations = 4.0 vs 4.0 prev

5yr inflation expectations = 3.0 vs 2.9 prev

Last week saw the US MBS index gain 0.36% in excess return, given a helping hand by declining volatility and a Federal Reserve that has floated the idea of downshifting to 25 basis point rate hikes going forward. Fed funds futures see a terminal rate of less than 5% and while the June FOMC meeting is a toss up, by the time summer cools into fall forecasters see a Fed cutting rates.

Barry Habib @ MBS Highway predicting an improved Q2 for inflation. Predicting inflation moving much lower and a drop in rates. Specifically calling for a May 10 improvement (April CPI). Largely due to the numbers being a 12 month average – and last years’ numbers increasing then. Therefore making YoY get better. PPI and 20 yr auction tomorrow and Debt Ceiling on Thu are the big events this week

While Friday’s Treasury announcement that the debt limit will be breached on 1/19/23 is concerning, the Treasury will again employ “extraordinary measures” to keep the government functioning through early June. If the ceiling isn’t raised by then, watch out. With the House in Republican hands and the White House and Senate both Democratic, this is exactly the same scenario as in 2011, the last time there was a major crisis.  Via

Wednesday – January 18, 2023

Solid open for MBS, being up 33 bps early. 10yT down 14. The overnight session started off with the Bank of Japan (BOJ) holding policy steady despite speculation that they would allow a wider band of yields (or make some other semi hawkish gesture). Then a couple more bps on domestic data

Retail Sales= -1.1 vs -0.8 f’cast [-1.0 prev] (last month revised down from -0.6)

Core PPI = 5.5 vs 5.7 f’cast [6.2 prev ]

Inflation at the wholesale level fell 0.5% month-over-month according to the Producer Price Index. This comes after a 0.4% increase in October and a 0.2% increase in December. The decline was driven primarily by a decrease in energy prices. The index was up 6.2% on a YOY basis.

Stripping out food, energy and trade services the index rose 0.1% MOM in January and 4.6% YOY. Overall, it looks like inflation is on the way down, however as far as the Fed is concerned it wants to see the labor market come more in balance.

Industrial production fell 0.7% in December, and manufacturing production fell 1.3%. Capacity Utilization fell from 79.4% to 78.8%. Again, I have to look at the Atlanta Fed’s estimate and I don’t see how this data comports with 4.1% GDP growth.

With mortgages rates now at a four-month low, we saw a healthy pickup in the mortgage application data with a +27.9% change week over week. According to the MBA, the 30-year fixed rate decreased 19 bps to 6.23% and that helped the pickup in both purchase and refinance activity. The refinance index was +34% WoW but down 81% compared to the same period last year.

Homebuilder sentiment rose slightly in January, according to the NAHB / Wells Fargo Housing Market Index. This is after a string of declines driven by rising interest rates.

Weaker domestic data, led by Retail Sales, gave the rally a second wind in the morning hours.  While some Fed speakers pushed back, others acknowledged the new “25bp hike” reality.  10yr yields were ultimately able to break and hold below the prevailing range boundary at 3.40-3.42.

China’s gross domestic product grew at 3% in 2022, according to data released yesterday, down from an 8.1% rate in 2021 and below the government target of 5.5%. It marks the second slowest pace since the 1970s, as the world’s second-largest economy struggled under strict COVID-zero policies and a decline in the real estate market.

The economy grew 2.9% in the fourth quarter as China relaxed its COVID-19 policies, which had stunted retail sales and disrupted production. Unemployment remains a concern, with the urban jobless rate at 5.5%. To help stimulate a recovery, China has eased its crackdown on the technology sector and is relaxing restrictions on real estate developers. Economists predict close to 5% growth in 2023.

Thursday – January 19, 2023

UMBS down 8 bps on the open. Bonds began the overnight session in stronger territory as overseas buyers dogpiled on Wednesday’s strong move. Gradual weakness set in after that.

Jobless Claims * 190k vs 214k f’cast, 205k prev

Continuing Claims increased 17k to 1.65m.

Philly Fed Biz Index

* -8.9 vs -11.0 f’cast, -13.7 prev

* Prices 24.5 vs 36.3 prev

* Jobs 10.9 vs -0.9 prev

* 6-mo outlook 4.9 vs -0.9 prev

Housing starts fell 1.9% MOM and 21.8% YOY to an annualized rate of 1.38 million. This was a touch above expectations. Building Permits fell 1.6% MOM and 29.9% YOY. This is not surprising given how lousy the home purchase market is. KB Home announced that their cancellation rate was so large, they were halting new projects and just working on the backlog.

NAHB Home Builder Survey increased 4 points from 31 to 35. Both present and future ratings increased. Traffic increased 3 – though very low at 23

Friday – January 20, 2023

MBS down 11 bps early.

Bonds began the overnight session with minimal losses, but yields rose at a faster pace when European trading started.  There are no big-ticket events or headlines driving the weakness, but some comments suggest an improved covid outlook in China and higher oil prices are adding to the pressure.

Most signs are pointing to quarter point hikes by the Fed from here on out. The mixed signals complicate discussions over when to pause following an anticipated quarter-point rate increase on Feb. 1.

Also MANY different opinions on when the first rate drop (because of recession) will be. Investors and economists continue to doubt Fed forecasts that rates will rise to above 5% from their current level just below 4.5%.

Existing home sales fell 1.5% MOM and 34% YOY to a seasonally adjusted annual rate of 4.02 million in December.   The median existing home price rose 2.3% YOY to $366,900. That sound to me like all of the activity is at the lower price points. Total housing inventory for sale was 970,000 units. Unsold inventory is a 2.9 month supply, which is historically super-low. All-cash buyers were 28% of sales. First-time homebuyers represented 31% of all sales, which was an improvement from 28% Properties remained on market for 28 days.

Fannie Mae and Freddie Mac have updated their LLPA matrices. These will go into effect in May 2023. The main change is that Fannie and Freddie reduced the penalties for low credit and high LTV.

Bonds rallied to the best levels in months earlier this week but have been retreating since then.  At first, the retreat was gradual.  By Friday, it was a bit more pronounced, but still lacked any compelling scapegoats.  Earlier in the day, analysts pointed to China reopening after covid lockdowns.  Heavy selling in European bonds spilled over to Treasuries as ECB speakers struck a hawkishtone.  Traders also may simply have been squaring up positionsahead of a week with no Fed speakers and a round of Treasury auction supply.

Common Sources and influences






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