Friday – January 13, 2023
Bonds began the overnight session just slightly weaker and then held perfectly flat in Asia.
UMBS down 14 bps on the open as the market continues to digest and debate the future, in light of CPI yesterday. With investors and the Fed in a face-off over what future rate decisions are going to look like, volatility will likely remain elevated until such a time as one of them blinks. This uncertainty should help keep banks’ mortgage demand on the sidelines through the beginning of summer.
Dec. import prices rose 0.4% m/m after falling 0.7% prior month, according to the BLS. Estimate of -.9% Reprice risk on the day is low, should be a pretty quiet day heading into a long weekend. Markets are closed on Monday for Martin Luther King Jr. Day, We aren’t likely to see rates drop too much further unless we get a dovish message from the Fed at the end of the month, and that’s not looking likely as of now. Fed members are still towing the company line that the fed rate needs to be above 5% and not come down in 2023.
Consumer sentiment improved in January, according to the University of Michigan Consumer Sentiment Survey. Inflationary expectations fell from 4.4% to 4% which is good news for those who want the Fed to take its foot off the brake. Consumer sentiment is still awful overall, stuck at the levels we saw during the Great Recession. Apartment rental rates rose 5% YOY according to data from Redfin. They were down 1.4% MOM and off 3.6% from the peak set in August. Some of this is seasonality, however the massive growth we saw in 2021 is over, and rents will generally lag home prices by 21 months or so.
The inversion between the 10 yr note and 3 yr Treasury is almost 120 bps. Strong correlation to recession.
It’s nice to be wanted, and agency mortgage bonds just spent the QE4 Era having their dance card constantly filled by not only a voracious central bank but by actual U.S. banks in general, too. However, the Federal Reserve has stepped away and is now allowing $11 billion or so each month of mortgages to slip unwanted right off its balance sheet, while large domestic banks, which increased their agency mortgage holdings by 36.1% from March 2020 until 2021 year end, have seen their holdings since that time drop 7.2%. Still, large domestic banks’ aggregate holdings come to $2.1 trillion, which is nothing to sneeze at, so the question becomes just how robust might bank demand be in 2023? Over the near term at least the answer is likely, “not very.”
Wells Fargo, which reported that it’s fourth-quarter earnings were half of what it earned in the same quarter of last year.
Elsewhere: There was better earnings news from the nation’s two largest banks, JPMorgan Chase and Bank of America, both of which beat analysts’ expectations