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MBS Highway Daily Updates 01/05/2023

Current Position: Carefully Floating Ahead of Tomorrow's Jobs Report

Mortgage Bonds are both sharply lower to start the day.

The Fed

The Fed Minutes showed that the Fed is focused on wage growth and they are waiting for the job market to get worse. How crazy: The Fed wanted more jobs, so they poured gasoline on inflation, but now they want people to lose their jobs to bring down the inflation they created.

Minneapolis Fed President, Neel Kashkari, is blaming the inflation we are seeing on surge inflation and demand, which have a correlation to Uber and surge prices. He blamed the Fed's faulty economic models for their mishandling of inflation... but as our good friend Peter Boockvar said, "It doesn't take an economist degree, a PhD, or even a class in Economics 101 to understand that when the federal government spends $5 trillion over two years (about 20-25% of the US economy at the time) and its central bank finances most of it by buying the bonds used to pay for it, that we're going to most likely have 'surge pricing' inflation and realize it then, not after the fact.

Kansas City Fed President, Esther George, said that she wants to get the Fed Funds Rate above 5% and stay there for some time until inflation is falling convincingly. When asked about declining rents and the fall in the money supply, she said they are paying attention but have not changed their stance.

Apartment List reported that rents fell 0.8% in December and are now only up 3.8% year over year. The gain has decelerated significantly, and we know this makes up a significant part of inflation...but the Fed is choosing to ignore this and seems focused on sending us into a recession.

ADP Employment Report

ADP released their employment report, showing that there were 235,000 job creations in the month of December, which was much stronger than the 150,000 expected. Small and medium-sized businesses added almost 200k jobs each, while large businesses shed 150k jobs. Looking at the sectors, Leisure and Hospitality led the gains.

ADP also reported that annual pay for job stayers increased 7.3% year over year, down from 7.6% in the previous report, while job changers saw an average increase of 15.2%, up from 15.1%.

This did not help the markets, as the Fed is focused on killing the job market to bring down inflation.

Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 19,000 to 204,000. Continuing Claims, or those that continue to receive benefits after their initial claim, fell 24k to 1.69M, but is still up 375k over the last few months. It's also important to note that this was during the holiday week and is likely skewed to the downside because of this.

Jobs Report Strategy/Technical Analysis

Tomorrow's big BLS Jobs Report will be reported at 8:30 a.m. ET. The market is expecting 200,000 job creations and for the unemployment rate to remain at 3.7%. While the ADP report and Claims figures were stronger than estimates, we still think tomorrow's BLS number may be weak. Last month, we saw everything pointing to a lower jobs number, but it surprised to the upside, and there may be some catchup to the downside in this report, especially with the markets likely braced for a higher number.

Mortgage Bonds have broken back beneath the 100 - day Moving Average and are now in a narrow range between the aforementioned ceiling and support at the 50 - day Moving Average.

The 10 - year is still trading in a wide range between support at 3.64% a and overhead resistance at the 50 - day Moving Average, which was tested earlier but is holding for now. So long as the market does not decline further throughout the day, carefully float into tomorrow's Jobs Report.


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