Current position: Carefully Floating
Stocks are lower, and Mortgage Bonds are trading near unchanged levels so far this morning.
Powell Speech
Yesterday, Fed Chair Jerome Powell spoke and had some interesting comments, but nothing groundbreaking:
"The reality is that we're going to react to the data. So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in."
The jobs data that came out for January was surprising because people wanted to see more slack in the labor market because a tight employment situation will continue to push up wages, which could then keep inflation elevated.
The Fed is expecting significant declines in inflation to occur this year; however, it will take "not just this year but next year" to get down to 2%.
The disinflationary process has begun, with progress especially in the price of goods. However, price gains within the services sector remain high, and housing services disinflation is in the pipeline.
CoreLogic Home Price Index
CoreLogic released their Home Price Index for December, showing that home prices declined 0.4% nationwide but are still up 6.9% from this time last year.
CoreLogic forecasts that home prices will decline 0.2% in January but increase 3% in the year going forward.
In total, CoreLogic reported that home prices have only declined 3% from their peak—not exactly a housing bubble. And this comes after 121 months of straight gains in home prices. And they believe home prices will rise 3% in 2023, which is meaningful for wealth creation.
10-year Auction
Later this afternoon at 1:00 pm ET, there will be a 10-year Treasury Note Auction, which could have a big impact on the bond market.
After getting as low as 3.33% last week, yields on the 10-year have shot up to 3.65% following the "strong" jobs report. But the trend in the 10-year is clearly lower, and we will likely continue to see yields move lower one inflation report at a time. The big question is: what will the level of demand be at today's auction?
Will investors take advantage of the spike in yields and invest ahead of next week's Consumer Price Index Inflation report, where it's likely yields will move lower? If we look back to last month, investors had a big appetite for 10-year Treasuries ahead of the CPI report. If we see something similar, which would make sense, especially with the recent spike in yields, we could see a nice afternoon for bonds. After all, it's almost like investors are getting another chance to lock in some higher yields because of the surprise and misleading jobs report.
On the other hand, if there is weak demand, pressure could be applied to the bond market. Stay tuned later this afternoon!
Mortgage Apps
The MBA released their mortgage application data for last week, showing that purchases rose 3.1% last week and are now down 37% year over year.
Interest rates decreased slightly to 6.125%, the lowest level since mid-September, but we know they got worse this week after the jobs data. Last year at this time, rates were roughly 3.75%, which means rates are around 2.375% higher today. Refinances jumped 18% last week but are still down 75% from this time last year.
Technical Analysis
Mortgage Bonds are continuing to form a base and hold support at the 100.758 Fibonacci level. Bonds are starting to move higher from this level and have room, especially if we get a strong auction this afternoon.
The 10-year is now just above the important 3.64% level, but there is nearby resistance at the 100-day Moving Average. Again, the auction this afternoon could be pivotal and could send yields back beneath this level, should there be strong demand. Because this auction is later today, we will have time to react, even if it's a bad auction. Begin the day carefully floating, but remain nimble around 1:00 p.m. ET.
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