MBS up 5 bps on the morning. At least it’s green!! Stocks in the red, down 31 points
Bonds were already modestly weaker in the overnight session but started losing more ground after the much higher than expected Retail Sales data.
Retail Sales = 0.7 vs 0.4 f’cast [0.3 prev]
Up 3.2% YoY. Food & Drinking is up 11.9%
However, that trend is beginning to reverse a bit. There’s no big, obvious development accounting for the reversal. It could be profit-taking among short positions or it could be the 4.25% technical target prompting value buying in Treasuries. Notably, the former would mean the good vibes are merely temporary.
China reported weak economic data overnight and cut interest rates. It also suspended reporting on youth unemployment data, which hit a record high of 21.3%. To put that number into perspective, the youth unemployment rate in the US was 7.9% in 2022. The increase in US Treasury rates is somewhat perplexing in the face of this, as weakness in China will send a disinflationary pulse throughout the world as commodity consumption falls and credit issues cause a flight to safety.
Property issues in China will almost certainly have an impact on global interest rates. China’s largest private property developer has missed payments on some of its bond issues, and sentiment is dour in the entire sector. If China enters a depression or severe recession, that will pull down global bond yields, and we should see all sorts of disinflationary impulses including a drop in commodity demand, a depreciating yuan and a flight to safety.
The real estate sector in China reached 30% of GDP, which is an eye-popping number which is way higher than the US during the bubble.
Homebuilder sentiment fell in August due to rising mortgage rates. Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%
The biggest news this week will likely be the release of Fed minutes on Wed afternoon. Everyone will be reading the hell out of those tea leaves. There seems to be a wider range of opinions of ‘what to do’ over the last week or so. Fed might be waiting to see a weaker jobs report to pause.
Yesterday we examined last week’s paradoxical bond sell-off in response to inflation data that should have helped. Today’s paradoxical shoe was on the other foot. Retail Sales crushed the consensus and although bonds sold off initially, they rallied back to stronger levels in short order. Granted, that recovery didn’t last, but by the time bonds hit weaker territory, the Retail Sales trade had long since passed. The initial resilience may speak to some value buying demand from traders who think 10yr Treasuries yielding over 4.25% are worth owning.
MBS lost 12 bps net today. Stocks dipped 51.86 points.
Meanwhile, in Agency news from the courtroom, Freddie and Fannie shareholders were awarded $612 million as it was found that the regulator of Fannie Mae and Freddie Mac improperly amended stock purchase agreements in 2012 when it allowed the U.S. Treasury to sweep up the companies’ net profits. The jury in Washington, D.C., awarded shareholders of the government sponsored enterprises the damages. Fannie Mae will pay junior preferred shareholders $299.4 million, and Freddie will pay $281.8 million. The jury also issued $31.4 million to owners of Freddie’s common shares.