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MBS Highway Daily Updates 01/31/2023

Current position: Carefully Floating

Stocks are lower and Mortgage Bonds are higher to start the day. The Fed kicks off their two-day meeting today, with their statement due for release tomorrow at 2:00 pm ET, with the Jerome Powell press conference to follow.

The markets are almost 100% pricing in a 25bp hike, but the Fed's comments will be of great importance. It's hard to imagine a world where the Fed does not continue to talk tough on inflation and continues to signal to the market that the job is not done. After all, the labor market appears to still be strong, even though there are some cracks and many companies are holding onto workers but significantly reducing hours, which is a form of job cut, especially when those hours are cut on average across the labor force.

Yesterday's Dallas Manufacturing Index was reported at -8.4, which was the 9th month in a row of contraction, following negative prints from NY, Philadelphia, Richmond, and KC. Our good friend, Peter Boockvar, highlighted some of the notable comments, which clearly point to a continued slowdown, a weaker jobs market, and lower inflation... at least in the manufacturing sector.

"Activity continues to slip, and selling prices are coming down. We still can't find any workers, and with our six-month projection, we have quit".

"We have definitely seen a slowdown in activity compared to prior months. It's as if the spigot got turned off. All our supply chain constraints are pretty much gone, with delivery times much closer to pre-pandemic times. We have work coming up, but right now we are very slow and struggling to get our hourly workers even 32 hours per week."

"Recession is on its way"

Employment Cost Index

The Employment Cost Index is old Fed Chair Alan Greenspan's favorite measure of inflation, as it measures wage pressures and costs, something the Fed is highly focused on. In Q4, the index rose 1% on a year over year basis, which was 0.1% below the estimate. If you were to annualize the figure, it means that employment costs would rise 4% over the year, which is 0.4% below the estimate.

The trend in inflation continues lower, which will be helpful for Mortgage Rates.

Case Shiller Home Price Index

The National Case - Shiller Home Price Index, which is considered the "gold standard" for appreciation, showed home prices fell 0.6% in November. This is always a weak time of the year for housing, and after seasonal adjustments, home prices were only down 0.3%.

While home prices have been softening a bit, they are still up 7.7% on a year-over-year basis. The pace of appreciation decelerated from 9.7% in the previous report and 20.8% at the peak in March. This does not mean that home prices are down 13.1% from their peak; it means that home price gains have slowed to only 7.7% annually. Home prices have only declined 3.6% nationwide from their peak, and while this is certainly a softening, it's a far cry from a crash of 20–30% declines. The 10 and 20-city indexes are down 5% from their peak, showing that the major cities are declining a bit more than the overall nation. Some of these cities were somewhat overheated and are now giving back a little more. When removing those cities, the rest of the nation is more flat from the peak, as evidenced by FHFA.

FHFA House Price Index

The FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Different from Case Shiller, it does not include cash buyers or jumbo loans. The FHFA reported that prices were down 0.1% in November and are up 8.2% year over year. According to FHFA, home prices are only down 1.2% from their peak.

Based on this, you can interpolate that the decline in Case Shiller is coming from higher-priced homes where there is less demand. Additionally, there are likely cash discounts being offered, where buyers paying in cash are able to command a lower price, which is why Case Shiller is also lower.

Here is a quote from the FHFA, which sounds similar to what we have been saying: "U.S. house prices were largely unchanged in the last four months and remained near the peak levels reached over the summer of 2022. While higher mortgage rates have suppressed demand, low inventories of homes for sale have helped maintain relatively flat house prices."

Apartment List Rental Report

Apartment List reported that rents fell 0.3% in January and are now only up 3.3% year over year, down from 3.8% in the previous report. The gain has decelerated significantly, and because this makes up a significant part of inflation, it will eventually lead to lower inflation readings, but it may not catch up until March 14, when we get the February figures.

The cooldown in rent growth is being mirrored by continued easing on the supply side of the market. Our vacancy index now stands at 6.1 percent, surpassing 6 percent for the first time since spring 2021 and up 2% from the low in October 2021. With a record number of multi-family apartment units currently under construction, we expect that supply constraints will continue to soften. 2023 could be the first time in years that we see property owners competing for renters, rather than the other way around.

Technical Analysis

Mortgage Bonds are about to test the limit at a double floor of support, formed by the 25 and 50-day Moving Averages. At the same time, the 10-year is getting close to its limit at a triple ceiling of resistance, formed by the 25 and 50-day Moving Averages, as well as the 3.64% Fibonacci level. With the limits on MBS and the 10-year still holding and yet to be broken, we can begin the week carefully floating.


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