MBS Highway Daily Updates 03/07/2023
Current position: Carefully Floating
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Mortgage bonds and stocks are both lower to start the day, following Fed Chair Jerome Powell's comments in front of the Senate.
-Ultimate level of interest rates is higher than previously anticipated.
-If data indicates, the Fed is prepared to increase the pace of rate hikes.
doesn't want to prematurely loosen policy.
-Strong January data is likely due to unusually warm weather.
Powell said that although inflation has moderated in recent months, the process of getting it back down to 2% has a long way to go and is likely to be bumpy. He went on to say that, if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.
He is also clearly afraid of inflation resurging like it did in the 1970s, saying that the historical record cautions strongly against prematurely loosening policy and that he will stay the course until the job is done.
Other Central Banks
The Reserve Bank of Australia raised rates by 25 bps today to 3.6%, as expected, but Governor Philip Lowe revealed some signals of pausing. Rather than firmly committing to more hikes, he said they would be data-dependent and did not commit to a hike in April. His comments were also dovish, stating that the CPI has peaked and that the inflation picture is brighter. As a result, global yields caught a bid and moved lower, which was then reversed after Powell's comments.
The Bank of Canada meets tomorrow, and we know they signaled in January's rate hike decision that a pause was coming.
The JOLTS data has shown that there are roughly 11 million job openings, which is 57% higher than pre-pandemic levels. But before the pandemic, there were much fewer work from anywhere situations, and now that there are, many of those jobs can be double counted, and postings for the same job can be duplicated in many areas.
LinkUp (LinkedIn), ZipRecruiter, and Indeed are showing job openings up 25–30% since before the pandemic, which is half of what JOLTS is showing.
There are some sampling concerns with JOLTs, as they are looking at a relatively small sample size of 21,000 people. LinkedIn, on the other hand, has 200 million users, which is 10,000 times as many as JOLTS.
On a year-over-year basis, JOLTS is showing that hiring plans are down 4.4%, but LinkedIn is showing a -23% decline. We think the JOLTS data needs to be taken with a grain of salt and that LinkedIn has a much better measure, showing that the jobs market is not as strong as some of the data suggests.
CoreLogic reported that home prices declined 0.2% in January, but are still up 5.5% year over year. They also forecast that from peak to trough, home prices will only be down 3%—a far cry from a housing bubble. CoreLogic also forecasts that home prices will fall 0.1% in February but will be up 3.1% in 2023, which is in line with our estimates.
The big news of tomorrow will be the ADP Employment Report, where the market is expecting 200k job creations. We will also get another testimony from Powell, mortgage applications, and an important 10-year note auction at 1:00 pm ET.
Mortgage Bonds are continuing to battle with the 99.547 level after breaking below it sharply following Powell's comments. Bonds have regained much of their losses and are trying to get back above them. The table is set for bonds to reverse higher with what we hope to be some weaker jobs data this week, especially with how oversold they have been. Begin the day carefully floating.