Current position: Carefully Floating
Stocks and Mortgage Bonds are both lower to start the week, but are well off their worst levels after some weaker manufacturing data.
We made a good call over six months ago, saying to circle your calendar on November 10, because we thought we would see Core CPI inflation make a turn lower and that the Bond market would react positively. Sure enough, it had one of its best days of the year, leading to a decline in rates. When we look forward at upcoming inflation readings, we believe that Q2 will be a very good period of time for inflation to move lower, causing another meaningful leg lower in rates. Specifically, we believe May 10th is another day you should circle, which is when the April CPI data will be released.
As Barry mentioned in this morning's update (make sure you watch), the inflation reports are rolling 12 month reports. That means that in the year-over-year calculation, the new monthly reading replaces that same monthly reading from a year ago. We can look at the numbers from last year that we will replace with new numbers for 2023 to get an idea of where inflation could go. The higher the replacement figure from last year, the easier it is to see year-over-year inflation decline. On the other hand, the lower the figure from 2022, the harder it is to see inflation make progress lower. Additionally, because shelter makes up 39% of core CPI, it's also important to look at the shelter figures from last year that we will be replacing.
January CPI (released Feb 14) - High replacement on overall core, low replacement on Shelter - may be hard to see meaningful progress.
February CPI (released Mar 14) - High replacements on both Core and Shelter - should see inflation drop.
March CPI (released Apr 12) - Low replacement on Core, high replacement on Shelter - will be hard to see progress.
April CPI (released May 10) - High replacement on Core and Shelter. This continues for the entire quarter, and May 10 should be the start of a big improvement in rates.
Manufacturing Continues to Show Weakness
The ISM Manufacturing Index showed that the last two months of 2022 ended in contractions. The first 2023 regional reading for manufacturing activity, released for NY, showed that activity plunged to -33. This was much worse than estimates of -8.6, and if you remove the low from COVID, this is the worst reading since March 2009.
Here are some notable findings from the internals:
New orders went from -3.6 to -31.1
Shipments dropped to -22.4 from +5.3
Backlogs fell to -14.3, marking the eighth consecutive month of contraction
Inventories rose slightly
Prices paid fell a sharp 17 pts to 33
Employment dropped 11 pts to its lowest since September 2020
Workweek fell further below zero at -10.4
While this is only one region, it continues to show that manufacturing is in a recession and points to broader economic weakness. The internals show backlogs falling, inventories rising, and prices paid falling sharply, showing that we should continue to see goods prices fall and help the inflation story.
CoreLogic Single-Family Rent Report
CoreLogic reported that rental price gains decelerated in November to + 7.5% from last year, which is a slower pace of increase from the + 8.8% in October. It is still almost double the average rental year over year increase before covid of roughly 4%, but this deceleration will help inflation move lower once it catches up in the numbers, which we think will happen in the first half of 2023.
Week Ahead
Wednesday: Mortgage Applications, Producer Price Index, Retail Sales, NAHB Housing Market Index, 20 - year Auction
Thursday: Housing Starts and Permits; Initial Jobless Claims; Debt Ceiling limit reached
Friday: Existing Home Sales
Technical Analysis
Mortgage Bonds opened the day sharply lower, but found support at the 25 - day Moving Average. After the weaker manufacturing data, Bonds recovered most of their losses and are now in the middle of the range, between the aforementioned support level and overhead resistance at 101.671, which has been a very tough ceiling.
The 10 - year is trading at 3.50%, in a wide range between a triple overhead ceiling and support at 3.43%, which has also been a tough level to breach. After locking in Friday and avoiding the move lower, we can begin the day floating, as support is holding and there is room to the upside.