MBS are up 5 bps in the early hours of trading. Stocks are flat.

A relief rally in Italian shares boosted risk appetite, while US equity futures pointed to a recovery on Wall Street in subdued trading Wednesday. Other markets tilted risk-on, with the euro strengthening and copper rebounding. Improving sentiment faces a key test Thursday when the latest US consumer price index is published.

The so-called US five-year inflation breakeven has risen to around 2.5%, just shy of the peak in April 2022, when it reached the highest since 2014. Thursday’s reading is expected to show that consumer prices grew 3.3% in July from a year ago, up slightly from the prior month but still near the slowest pace in two years.

Fed officials seem to be split on the Fed’s next move with some stating that the current hiking cycle must come to an end and others saying that rates have further ground to climb to bring inflation back to target. The jobs market has been resilient throughout the Fed’s rate hiking, a backbone to the strength of the economy that the Fed has watched closely.

China has slipped into deflation, which will almost certainly affect developed economies and their fight against inflation. Their consumer price index fell 0.3% year-over-year in July, and their producer price index was down even more.

China seems to be following the familiar pattern where a period of supernormal growth triggers a real estate bubble, similar to the US in the early 20th century and Japan in the 70s and 80s. That bubble has burst, and China is grappling with a massive oversupply of property, along with vacant cities built on spec.

China will probably try and export their way out of the problem, and since their domestic demand is moribund they will run a massive trade surplus. That means China will buy US Treasuries and MBS instead of US goods and services which will help push down rates in the US.

SF Fed released a paper estimating that housing costs will drop from 7.8% to 5% by Nov.  Then go negative in 2024.  This will help inflation.  Cleveland Fed is predicting that headline inflation will INCREASE 0.4% in July and increase from 3% to 3.4%.  Largely due to energy prices.

Credit Card debt has reached record highs, surpassing $1.0T for the first time.   Rose $45B in Q2 alone.  Avg rate moved to 21-25% (new record).  Delinquency rates are highest in 5 years too.

Ho Hum 10yr Auction. No Drama in Bonds.  10yr Treasury Auction

  • 3.999 vs 3.998 expectations
  • Bid to cover: 2.56 vs 2.45x avg
  • Indirect bid 72.2 vs 67% avg

Bonds are almost perfectly unchanged after the 10yr auction came in pretty much on the screws.

On the eve of any big-ticket economic data, it’s never a bad idea to revisit what you already know to be true: it’s a coin flip.  If there were a way to know how the data would come in, or even if it was more likely to come in stronger/weaker, traders would be all over it and they wouldn’t wait until the data actually arrived.  Thus, locking vs floating on such afternoons is simply a form of gambling.  If you float, you’re gambling in order to try to get lucky with rates going lower.  If you lock, you’re gambling on the hope that rates don’t drop so much after you lock that you lose the deal.  The only decision is to pick which one of those scares you less.

MBS closed up 11 bps.  Stocks down 31 points.

United Wholesale reported second quarter earnings that beat the street, with origination volume climbing to $31.8 billion, which was up 43% compared to the first quarter and up 6.4% compared to a year ago. Gain on sale margin compressed to 88 basis points in Q2 compared to 92 in Q1 and 99 a year ago. Purchase volume was 88% of total volume.

UWM is guiding for third quarter volume to come in between $26 and $33 billion, and gain on sale to range between 75 and 100 basis points. The stock is up about 7% pre-open.

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