MBS Highway - Daily Update 10/4/22
Current position: Floating
Stocks and Mortgage Bonds are both flying higher to start the week now that September is behind us.
Kathy Jones, the chief fixed income strategist for the Schwab Center for Financial Research, believes that the worst in the Bond market is behind us. She referenced that the Bond market, which was the first into recession like conditions, may be the first out (FIFO). She also cited that with yields much higher, it's now becoming an attractive investment, which will help to push yields lower.
OPEC + will meet in Vienna, Austria, on Wednesday to decide on the next phase of production policy - They are considering a historic output cut of over one million barrels per day, and when you couple that with the US stopping deliveries from tapping of the Strategic Petroleum Reserve in November and potential increased sanctions from Europe on imports of Russian crude in December, oil prices could be pushed back up above $100/barrel. Of course, this would not help the inflation picture.
Fed Vice Chair, Lael Brainard, spoke on Friday and said, "It will take time for the full effect of tighter financial conditions to work through different sectors and to bring inflation down... We also recognize that risks may become more two sided at some point. Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle. Proceeding deliberately and in a data dependent manner will enable us to learn how economic activity and inflation are adjusting to the cumulative tightening and to update our assessments of the level of the policy rate that will need to be maintained for some time to bring inflation back to 2%."
Her comments acknowledge the two - sided nature of the impact of their hikes and opens the door for a 50bp hike, instead of a 75bp hike, on November 2. Remember the three most important members of the Fed are Powell, Brainard, and NY Fed President Williams. Williams will be speaking this afternoon and we will see what his thoughts are on the progress of the Fed hikes. Remember - Before Nov 2 we will hear from the Fed mole, Nick Timiraos, if the Fed is going to change to 50bp.
With the ADP and BLS Jobs Reports due for release on Wednesday and Friday respectively. The market is expecting 200k job creations in ADP and 250k in the BLS. The unemployment rate is expected to remain at 3.7%.
Mortgage Bonds are flying higher, but still continue to trade in a very wide range between support at 97 and overhead resistance at 98.65... There is still roughly 60bp of room to the upside before resistance. The 10 - year is at 3.67%, with room to move lower until reaching 3.50%. Looking at the momentum indicators (Stochastics), there are crossovers and Bonds are starting to come higher out of oversold territory. If this continues, we could see follow through higher. Begin the day floating.