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MBS Highway Daily Updates 03/10/2023

Current position: Carefully Floating

Make sure to take the MBS Highway Housing Survey to get a real-time read on the housing market, and feel free to share with referral partners for their input HERE.




Rollover

Mortgage bonds are sharply higher following some news showing cracks in the job market as well as the banking system.


Additionally, yesterday, BOJ Governor Kuroda did not even get their version of the Fed Funds Rate back to zero, let alone surprise us by adjusting the yield curve. This helped global yields move lower.

February Jobs Report

The Bureau of Labor Statistics (BLS) reported that 311,000 jobs were created in February, which was stronger than expectations of 205,000. There were 34,000 negative revisions to December and January, which does temper the gains a bit.


105,000 of the gains were from Leisure and Hospitality, which has been a huge driver of job gains. But we are almost back to pre-pandemic levels, so how much is left in the tank for future gains from this sector? Remember, the latest JOLTS report showed a drop of 194k in job openings in this sector.


Remember, there are two surveys within the jobs report: the business survey and the household survey. The business survey is where the headline job creation number comes from and includes a lot of modeling and estimations. The Household Survey is where the unemployment rate comes from and is derived from calling households to see if they are employed.


The Household Survey has its own job creation component, and it showed that there were only 177,000 job creations while the labor force increased by 419,000. This caused the unemployment rate to rise from 3.4% to 3.6%.


There was a huge jump of 343,000 more individuals that were unemployed for less than 5 weeks. If initial claims would have risen significantly or job creations would have dropped significantly, then we could potentially see a reason for this. But since initial claims have been exceptionally low and hiring is supposedly on fire, the only explanation for this is that individuals are having a more difficult time quickly finding a job after losing one. Think of a bucket being filled with water (the newly unemployed). The bucket represents the first five weeks of unemployment. That bucket also has a drain from people being hired or having their unemployment extended. If the flow into the bucket increased dramatically, then we could see the bucket fill more quickly than it is drained. But the flow in has actually been constricted, so the only explanation is that, as stated above, the job market is cooling.


Average hourly earnings were up 0.2% in February, which was lower than the 0.3% expected and the smallest monthly increase in a year. They are now up 4.6% year over year.


Average weekly hours worked declined by 0.1 to 34.5 hours. This is contrary to the supposedly hot job numbers being reported. We all know that before hiring additional workers, hours are increased. As a result, average weekly earnings declined slightly. This brings the year-over-year increase to 4%, which is a big drop from last month's year-over-year increase of 4.7%.


Silvergate & SVB

The Fed wanted to cause pain, and they got it. Besides seeing some cracks in the labor market, they are now starting to show up in the banking system. You may have heard of Silverage (mostly crypto) and now SVB (Silicon Valley Bank), who are having issues.


Let's talk about how a bank makes money: banks take deposits from customers and essentially borrow that money. They pay them a rate of interest to hold that money, and then lend it out for longer durations of time and make the spread between the two. This works well in a normal market with a positive yield curve.


But since the Fed has been hiking, the yield curve has inverted. That means that shorter-term yields are now higher than longer-term yields. This quickly evaporates the gains that they would make, as they are paying depositors much more money.


These banks also make investments in longer-term bonds, like the 10-year. Let's say a bank invested $100M in a 10-year bond when yields were only 2%. Now that yields are closer to 4%, those 10-year Treasury notes that they are holding are worth less in the current market. If these banks want to take out a loan, their assets are going to be valued much lower. Adding to that, there are concerns with how well capitalized these banks are, and if confidence runs thin and there is a run on the bank, it exacerbates the problem. Remember, due to fractional reserves, banks only need to keep about 10% of reserves on hand (actual deposits).


All of this fear and weakness is helping Bonds. Additionally, the Fed has to contemplate this when hiking rates on March 22. We see a zero percent chance of a 50bp hike, otherwise they could make the situation worse.

Next Week

Next week will be very important, highlighted by the CPI inflation report.

Tuesday: Consumer Price Index, NFIB Small Business Optimism Index

Wednesday: Producer Price Index, Retail Sales, Mortgage Apps, NAHB Housing Market Index

Thursday: Housing Starts and Permits; Initial Jobless Claims

Friday: Industrial Production & Capacity Utilization


Technical Analysis

Mortgage bonds are making a sharp move higher, breaking above several resistance barriers and now testing the 100-day moving average. We mentioned that with some friendly news, we could see bonds test this level. It has been difficult to be patient over the last week with the deterioration in the market, but our patience is being rewarded.


The 10-year has moved back down to 3.70%; it was just at 4% a few days ago! The 10-year has erased all of the moves higher since last month's CPI report and is now testing its 40-day moving average. If this level is broken, the next stop is 3.64%.


Begin the day carefully floating, but if we see profit-taking and Bonds start to give back gains, you will likely be hearing from us, as we want to preserve this nice move higher.


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