MBS Highway Daily Updates 01/18/2023
Current position: Carefully Floating
Stocks and Mortgage Bonds are both higher so far this morning after some bond-friendly news out of Japan and much lower than expected producer inflation.
The Bank of Japan, which caused turbulence a few weeks ago when they adjusted their yield curve control and allowed their 10 year bond to rise from 0.25% to 0.5%, met again today and did nothing. They were expected to make another adjustment to their purchases and allow their 10 - year to rise even further. It appears they are not that concerned with inflation and are also handcuffed because of their massive amount of debt and the need to keep the financing costs on that debt low. If they made an adjustment, it would cause competing yields, like our 10 - year to move higher. Since they did nothing, the Bond yields around the globe moved lower.
Producer Price Index
The December Producer Price Index (PPI) report showed that overall producer inflation decreased by 0.5%, which was much cooler than the -0.1% drop expected. Year over year, inflation declined from a downwardly revised 7.3% to 6.2%. This was much lower than the 6.8% expected and is a 1.1% drop from the previous reading. Think about the progress that has been made on the producer inflation side of things. This reading was at 11.7% at its peak and is now almost half what it was.
The Core rate, which strips out food and energy prices, rose 0.1%, which was in line with estimates, but the previous report was revised lower by 0.2%. Year over year, core PPI declined from 6.2% to 5.5%, which was also lower than expectations of 5.7%. Overall, inflation continues to subside, and the bond market is rallying.
Retail Sales were down 1.1% in December, which was worse than the 0.8% drop expected. It's clear that the Fed rate hikes are taking hold on the economy and are making financing purchases and servicing debt more expensive, which leaves the consumer with less discretionary income for spending on things like retail. This causes a slowdown and should lead to continued declines in inflation.
The MBA released their Mortgage Application data for last week, showing that purchases rose 25% last week and are now down 35% year over year. We mentioned how poorly the MBA seasonally adjusts last week, and here we are seeing some catch up, but this too could be skewed. We will wait to see how the figures smooth out next week.
Interest rates decreased from 6.42% to 6.23%. Last year at this time, rates were roughly 3.625%, which means rates are around 2.625% higher today. Refinances rose 34% and are down 81% year over year.
Mortgage Bonds amazingly, are once again testing the wall of resistance at the 101.671 Fibonacci ceiling. This level has been tested six times and has held each time. On the other hand, the 10-year was able to break beneath its wall of support at the 4.34% level and is now trading at 3.39%. If yields can maintain this move lower, the next stop is 3.28%, which is the 200 - day moving average—a level not tested in over a year. We have to remain on guard that MBS do not get rejected from the wall of resistance, but the move lower in the 10 - year is optimistic. Continue carefully floating.