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MBS Highway Daily Updates 03/16/2023

Current position: Carefully Floating

Stocks are lower and mortgage bonds are slightly higher so far this morning.

The ECB decided to hike 50bp this morning, not caring about the banking crisis in Europe, although they did not commit to any further hikes. Yesterday, the financial contagion risks spread to Credit Suisse after their largest shareholder said they wouldn't raise their stake. As a result, the stock plunged as much as 31%, but the markets found some support on the news that the Swiss National Bank was willing to step in to provide liquidity.

Will our Fed now have cover to continue hiking on March 22? We hope they don't, or that they do 25bp and clearly explain that they are done after that.

In any case, credit contraction lies ahead, as the banks need to shore up their balance sheets, which gives them less ability to lend and is deflationary. This should be good for the bond market.

Keep an eye on the yield curve "de-inverting." We're now getting close. The day that happens after an inversion, the countdown to recession starts in earnest: an average of 4 months and a median of 2 months.

Initial Jobless Claims

Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, fell 20,000 to 192,000, back below 200,000. Continuing Claims, or those that continue to receive benefits after their initial claim, fell 29,000 to 1.684M. The labor market still remains tight, with employers trying to hold onto workers.

Housing Starts & Permits

Housing starts in February were up almost 10% on an annualized basis, at 1.45 million units. Starts are down 18% year over year. Single-family starts, which are most important, rose 1.1% last month at an 830k unit pace, but January was revised lower from 840k to 821k, so in net single-family starts were lower, which means supply will be very tight. They are down 32% year over year.

Housing permits, which are the future supply, were up almost 14% last month at a 1.52 million unit pace and are down 18% year over year. Single-family housing was down 7.6% last month to 777k units and is down 36% year over year.

Housing completions were up 12% last month to 1.56M units, while Single Family rose 1% to 1.04M units.

NAHB Housing Market Index

The NAHB Housing Market Index, measuring builder confidence, rose 2 points in March after rising 7 points in February and 4 points in January. The index is now at a level of 44, which is 4 points above expectations and much higher than it was a few months ago when it was at 31, but still below the level of 50, which is the line in the sand between expansion and contraction.

Looking at the internals:

  • Present conditions: increased 2 points to 49

  • Future outlook fell 1 point to 47

  • Prospective Buyers Traffic increased by 3 to 31 (the third month in a row of increases)

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 took out a loan and their capital is tied up by new projects. With builders showing a big bump in confidence, it is a positive sign to see.

Manufacturing Weakness

After a deeply negative New York Manufacturing Index yesterday, the Philadelphia Manufacturing Index was negative this morning for the seventh month in a row. Clearly, certain areas of the economy are already in a recession.

Technical Analysis

Mortgage bonds held support at the 50-day moving average and are moving higher today, breaking above the 100.758 Fibonacci ceiling. If Bonds can hold onto these gains, the next stop is the 200-day moving average, almost 50bp above present levels.

The 10 - year has moved down to 3.41%, breaking beneath its 200-day moving average and Fibonacci support. This is not a convincing break yet, but if it is confirmed, yields can move much lower, towards 3.33%. Begin the day carefully floating.


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