Mortgage Market

Good morning, market mavens! As we kick off the workweek post-holiday, mortgage-backed securities (MBS) are down 12 basis points—a slight rebound from earlier figures. Meanwhile, the 10-year Treasury is up six basis points, hovering at the 4% threshold. Mortgage bonds have been in lockstep with the 25-day moving average for nearly two weeks, a trend we’ll dissect shortly.

Bostic’s Take on Inflation and Rate Cuts

Atlanta Fed President Raphael Bostic dubbed Mr. Luv-a-Luv for his market influence, emphasized a prudent approach in his recent statement. As a voting member this year, Bostic’s stance is clear: inflation must be reined in towards the Fed’s 2% target before considering rate cuts. While aligned with policy objectives, this declaration strikes as a belated echo of what the market has long anticipated.

Inflation Insights: A Retrospective Glance

Our friend Peter Bookvar has highlighted Bostic’s message, emphasizing the timing mismatch of his statements. The Fed’s previous missteps—keeping rates too low for too long—may be mirrored now by a delay in rate adjustments. With inflation indicators like the PCE at 1.85% over the last six months, the trajectory suggests we are already cruising toward the sub-2% target.

Rental Market Reflections

Turning to the rental sector, which significantly influences the shelter component of inflation metrics, we anticipate more accurate data in the coming months. CoreLogic’s report indicates that blended annual rent increases have moderated to around 2.7%. This is a notable deceleration from last year’s 7.5% rise, suggesting a cooling trend in rent inflation.

PCE vs. CPI: The Divergence

The upcoming PCE and CPI releases will shed more light on the inflation landscape. The difference between these readings and real-world impacts is stark, and it appears the Fed may be late again—but this time in cutting rates. A mathematical dive into the weightings of CPI and PCE components reveals we’re closer to a 2.4 – 2.3% core rate, aligning us more firmly with the 2% inflation goal.

The New York Manufacturing Index: A Warning Signal

The New York Manufacturing Index, a barometer for the manufacturing sector’s health, has plunged to -43.7, signaling a contraction not seen since 2001, excluding the COVID period. This points to a bifurcated economy: while some sectors fare well, manufacturing is undoubtedly in a recessionary phase.

Looking Ahead: Retail Sales and Resistance Levels

Tomorrow’s retail sales data will be closely watched, with expectations for a modest uptick. As for the MBS, continue to track the 25-day moving average—a resilience that may hint at underlying market stability despite recent dips. The 10-year Treasury faces resistance at the 25-day moving average, with the 200-day mark and Fibonacci levels as distant hurdles. While technical indicators suggest potential volatility, the fundamentals emphasize a stabilizing environment.

As we digest these indicators, the message is clear: economic prudence is paramount in times of uncertainty. The Fed’s navigation through inflation targets and rate decisions will be critical in shaping the market’s path forward.

In the landscape of financial markets, mortgage bonds have consistently hugged the 25-day Moving Average over the last week, yet they’ve shyly stopped short of breaching the resistance threshold. This cautious approach could soon pay off, as recent inflation data hints at the potential for an upward breakout. There’s approximately a 40 basis point airspace before we encounter the next resistance ceiling.

The Ten-Year Treasury Note’s Strategic Positioning

The ten-year treasury note is tactically dialing back, marked by a 3.97% yield, taking a step back from the robust walls of resistance built by the 200-day Moving Average, the 25-day Moving Average, and the staunch 4.056% Fibonacci level. Investors should take note of the opened route towards a 3.76% yield, indicating a new zone of support.

As we traverse this economic terrain, the guiding principle remains to keep steady on the current course. The market’s whisperings suggest the path ahead looks promising for a sustained, upward trajectory.

Market Temperature: Today’s Economic Thermometer

A pleasant good morning to our discerning investors! Today’s snapshot reveals a modest ascension for mortgage-backed securities, ticking up by seven basis points—showing improvement from their earlier stance. The ten-year treasury has balanced to a stable level, aligning itself around the 4% benchmark. This stabilizing effect is attributed mainly to the unexpected chill from the Producer Price Index (PPI) report.

December’s Inflation Surprise: Cooler Than Anticipated

The PPI for December unveiled a lower-than-forecasted figure, with a decrease of 0.1%, surprising the market and doubling the positive expectations. Despite the previous year’s weak comparatives, the annual inflation narrative held its breath, inching up only to 1% against the anticipated 1.3%.

When isolating the core components—sans food and energy—the numbers stood their ground at 0% change, contrary to the anticipated modest rise. On an annual scale, this core index relaxed from 2% to 1.8%, subtly outperforming market expectations.

Global Dynamics and Inflation’s Pulse

Casting a strategic eye on global events, some developments could inject volatility into the inflationary pulse. The critical trade arteries through the Red Sea are under scrutiny, where any disturbances could translate into inflationary trends.

The forthcoming week is poised to offer diverse economic data, with a respectful intermission on Monday to honor Martin Luther King Jr. Day. Post-holiday, expect insights into housing data, retail figures, and their potential market influence.

Analyzing the Graphs: MBS and Treasury Yield Trajectories

Observing the MBS performance, we’ve noted a commendable push past the 25-day Moving Average following the market’s absorption of the Consumer Price Index report. Meanwhile, the ten-year treasury yield has subtly retreated below the recent upward trend, hinting at a potential softening towards a more comfortable 3.76%.

Insights from the Momentum Indicators

A closer examination of momentum indicators narrates a story of fluctuation and revitalization. The Stochastics, once indicating an overbought scenario, now suggest a regaining of upward momentum, potentially prefacing a continued elevation in the market.

With market signals pointing towards favorable conditions for bonds and a clear stretch ahead, we recommend holding course with the current strategy. Anticipating further market enhancements, we’ll reconvene discussions after the holiday. Stay the course, and prosperity may follow.

Good morning, everyone. Today’s focus is on the latest jobs report, which initially seemed strong but may not be as robust as it appears. Mortgage-backed securities are currently down by eight basis points, showing a market still trying to digest the implications of this jobs data fully. Let’s break down the details and understand why this report might be misleading.

The December Jobs Report: A Closer Look

On the surface, the December jobs report showed a creation of 216,000 jobs, surpassing estimates. However, previous months saw a downward revision of 71,000 jobs, tempering the impact of this headline number. The initial reaction to the report caused a drop in mortgage-backed securities, but as the market examines the details, we might see some recovery.

BLS Data and Revisions

There’s a notable pattern in the Bureau of Labor Statistics (BLS) data, where initial job creation numbers are often revised downwards in subsequent months. This trend raises questions about the reliability of the initial figures and suggests that the current report’s strength might be overstated.

Wage Pressure and Average Working Hours

The report showed an unexpected rise in average hourly earnings, which could indicate wage pressure inflation. However, average weekly hours worked declined, which could balance out the impact of higher hourly wages on overall earnings.

The Household Survey Discrepancies

The household survey, which determines the unemployment rate, showed a loss of 683,000 jobs, contradicting the positive headline figure. The unemployment rate remained at 3.7%, but this was due to a large number of people exiting the labor force. If these individuals were counted, the unemployment rate would likely be higher. This discrepancy indicates a weaker labor market than the headline numbers suggest.

CoreLogic Housing Data

CoreLogic’s loan performance insights for October show healthy figures across delinquency and foreclosure rates, indicating stability in the housing market. We encourage you to participate in our housing survey to gain insights into local market conditions.

Technical Analysis: Mortgage-Backed Securities and Treasury Yields

As we examine the charts, mortgage-backed securities have been on a downward trend since the start of the year, struggling to maintain the gains seen since October. The 10-year Treasury yield, currently at an important resistance level, broke out of its falling trendline but now faces multiple resistance levels. 

We hope for improvements in the market throughout the day and into next week, especially with the CPI data potentially showing a decline. We will continue with a floating stance and keep you updated on any significant market movements.

Wishing you all a great day as we navigate these market dynamics. Stay tuned for further updates and insights.