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.

From www.WellThatMakesSense.com

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