MBS up 5 bps early. Stocks have lost 20 points.

The New Residential Construction report (the source of starts/permits above) almost never accounts for a reaction in financial markets. This morning is proving to be an exception due to the uncommonly large beat.

Housing Starts = 1.631m vs 1.4m f’cast [1.401m prev]

Building Permits = 1.491m vs 1.42m f’cast [1.417m prev]

The number was 5.2% above April, but still 12.7% below May of 2022. The Street was looking for 1.4 million, so this was an upside surprise. Both multi (5+ units) and single-family saw big increases. Building Permits rose to 1.49 million.

Today (and this week) doesn’t have a lot of economic data (housing data is important but doesn’t affect rates) but does have a lot of Fed speakers. There has been a clear shift after last week’s Fed meeting that markets now taking the Fed seriously that rates will stay at these levels longer, and markets are now pricing in the probability that we will end the year with the Fed rate at 5.25%… meaning markets are pricing in a July rate hike and then a hold.

Right out of the gate this morning, bonds responded to the massive beat in the Housing Starts data.  We almost never see housing-related economic reports driving the bond market these day, so this was perhaps the most interesting part of the day.  At least it would have been if yields didn’t reverse course in short order.  There was little to credit other than the 9:30am NYSE open or political headlines.  Either way, MBS hovered within an eighth of a point of unchanged, but rates were nicely lower versus Friday (lenders priced conservatively ahead of the 3-day weekend).  The next 2 days bring congressional testimony from Fed Chair Powell.

MBS ended the day down 2 bps.  Stocks down 20.88.

The improvement in construction is good news for the mortgage business, and Goldman is out there with a positive call on a couple mortgage companies: AGNC Investment and Rithm Capital. AGNC is a mortgage REIT which invests in spec pools while Rithm is New Rez, Caliber and Shellpoint.

The bull case for AGNC is based on narrowing MBS spreads, which is a function of interest rate volatility. The ICE MOVE Index, which is sort of like a VIX for bonds, is at the bottom of its tightening cycle range. The lower it goes, the more attractive MBS are against Treasuries.

From www.WellThatMakesSense.com

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