Current position: Floating
Mortgage bonds are rebounding after a tough day yesterday, with the charts showing a reversal candle pattern, so long as we don't give up these gains throughout the day. The 10-year has broken back below 4%, which is a good sign.
While the recent spike in rates can be a deterrent for potential buyers, it also provides an opportunity. There is less competition currently, and buyers can use this high-rate environment to garner price discounts and seller concessions, where they can likely get their 2-1 buydowns or permanent buydowns paid for.
Additionally, because of very low inventory, there is an opportunity to see price appreciation once rates come down and demand picks back up.
How low is inventory? The latest figures for active listings show that they have decreased to only 578,000 homes, which is not far off record low levels.
Fed in Focus
Later today there will be several Fed members speaking, and after hearing from Kashkari and Bostic earlier in the week, we have an idea of what they may say.
Kashkari made several comments that were flawed:
"We are in a hot labor market."
He is clearly looking at the Jobs Report, which we know was flawed due to adjustments and population controls.
"It's concerning that rate hikes so far have not brought down service inflation".
Housing and rental costs are part of the services sector, and we know why they have not come down yet in the inflation reports—the lag. But it will catch up and start adding significant deflationary pressure.
"We are not in a recession."
He is likely referring to the low unemployment rate of 3.4%. But it went down because of the skewed jobs data, and recessions occur when the unemployment rate reaches its lowest point and begins to turn higher.
"If we declare victory too soon, there will be an outpouring of exuberance, and we will have to do even more work."
The Fed doesn't want to signal victory because it will cause a celebration in the market and it will work against their goal of reducing asset prices and slowing the economy.
Bottom line: We know the Fed is afraid to make another mistake. They made the mistake already of thinking that inflation was transitory, and now they seem steadfast on killing the economy, so inflation is truly quelled. But we would argue that they are going to make another mistake by not being able to see where things are headed. While this provides a short-term headwind, it will lead to a recession, a slower economy, lower inflation, and lower mortgage rates.
Next Week
Monday: No meaningful economic data
Tuesday: Fed Chair Powell's Speech
Wednesday: ADP Employment Report, Mortgage Apps, JOLTS, Powell Speech, 10-year Auction
Thursday: Initial Jobless Claims, 30-Year Auction
Friday: BLS Jobs Report
Technical Analysis
Mortgage Bonds are deeply oversold and have finally started to show signs of a reversal. If the gains today are kept, the last three days will have formed a "morning star" pattern. When this occurs after a downtrend and in oversold territory, it's a reliable indicator of a rebound. This is the opposite of the "evening star" pattern we saw form from February 1–3, when bonds were in overbought territory, and we know how things went much lower following that.
With the Fed's speakers today, there is a chance the gains are given back and the pattern is invalidated. We have to make sure we remain above support at 99.203. After locking the last few days, we can begin the day floating.