MBS Highway Daily Updates 02/16/2023
Current position: Carefully Floating
Stocks and mortgage bonds are both lower after the Producer Price Index inflation report showed that inflation continued to move in the right direction, but not as much as expected. Additionally, new construction data is showing that there is a lot more demand than supply.
Housing Starts & Permits
Housing starts in January were down 4.5% to 1.3 million units at an annualized pace. Starts are down 21% year-over-year. Single-family starts, which are most important, were down 4.3% last month at an 840k unit pace. They are down 27% year over year.
Housing permits, which are the future supply, were up 0.1% last month at a 1.34M unit pace and are down 27% year-over-year. Single family were down 1.8% last month to 720k units and are down 40% year over year.
Housing completions were up 0.1% last month to 1.4 million units, while single-family homes rose 4.4% to 1.04M units. Both are up 12–13% from last year.
With household formations for 2023 looking like 1.9M, but builders completing just 1.4M homes, there doesn't appear to be much vacancy available.
Additionally, permits are your future supply... And with permits at 1.34M units, compared to 1.9M in formations, supply will remain tight and should be well below demand, supporting home prices.
NAHB Housing Market Index
The NAHB home builder survey for February increased by 7 points from 35 to 42, which is the strongest one month gain in 10 years and the second month of gains in a row. All three components rose sharply, but traffic is still depressed.
-Present conditions: increased 6 pts to 46
-Future outlook rose 11 pts to 48
-Prospective Buyers Traffic increased by 6 to 29
These figures are still in contraction territory, being below 50, but are clearly rebounding and going in the right direction.
It's also important to note that the confidence comes from builders, who are completing new homes. There is a difference between someone selling an existing home and a builder selling a new home. Existing home owners still receive a benefit as long as they are living there, even if they can't sell the home as fast as they want. Builders are much more sensitive, as they have carrying costs if they take out a loan and their capital is tied up from new projects. With builders showing a big bump in confidence, it is a positive sign to see.
Producer Price Index
The January Producer Price Index (PPI) report showed that overall producer inflation increased by 0.7%, which was hotter than the 0.4% expected. Additionally, the December reading was revised higher from -0.5% to -0.2%.
Year-over-year, inflation declined from and was upwardly revised from 6.5% to 6%, the lowest level since March 2021 and well below the peak of 11.6% in March 2022. With that being said, the decline in today's report was much higher than the 5.4% expected and a bit of a disappointment, similar to Tuesday's CPI report.
The Core rate, which strips out food and energy prices, rose 0.5%, which was hotter than the 0.3% expected. Additionally, December's figure was revised higher from 0.1% to 0.3%.
Year-over-year, core producer inflation declined from and was upwardly revised from 5.8% to 5.4%. While this moved in the right direction, it was much higher than the 4.9% expected. There has still been strong progress, with the peak in this figure being 9.7% last March.
The big reason for the disappointing report was energy prices, which rose 5% in January. This even impacts the core reading, because it makes all of their costs go up for manufacturing and transportation.
While the PPI is an important reading, it does not always translate to consumer inflation. If they don't have the pricing power, they may eat into margins and not pass those costs on to the consumer.
Initial Jobless Claims
Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, fell from 1,000 to 195,000 and remains below 200,000. Continuing Claims, or those that continue to receive benefits after their initial claim, rose 16,000 to 1.7M...the most since mid-December and just below a one-year high.
We are continuing to see companies try to hold onto workers, but once employees are let go, they are having a hard time finding new work, signaling a slowdown in hiring.
Mortgage bonds have broken beneath support at 100.094, but there is nearby support, roughly 15bp beneath present levels. Bonds are also deeply oversold and could be due for a rebound in the coming week. After locking twice over the last week, and with support nearby, we can begin the day carefully floating.