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MBS Highway Daily Updates 03/27/2023

Current position: Locking Bias

Register for the live webinar Barry Habib and Megan Anderson will be hosting with Rene Rodriguez on effective communication HERE.

Barry was just featured on Mauldin Economics in an interview with Ed D'Aagostino, which you can watch HERE.

Stocks and mortgage bonds are both lower to start the day after mortgage bonds were nicely higher in the early going.

Fed's 2% target

The Fed has had a 2% inflation target for a long time now, but where did it come from? Here is the story that was quoted in David Rosenberg's report this morning, originally from Jeff Sommer in the NYT.

Behind closed doors, in a pivotal 1996 Federal Open Market Committee meeting, Mr. Greenspan said the Fed's goal was 'price stability'. "A transcript of the meeting shows that he defined that goal this way: "Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions," he said."

And in that crucial 1996 meeting, a distinguished economist and Fed official named Janet E. Yellen - now the Treasury secretary, and, before that, a Fed chair herself and pressed Mr. Greenspan to "please put a number on" his estimate of price stability.

"The transcript shows that he said 'zero' was the proper target if 'inflation was correctly measured.' But it is difficult to measure inflation accurately, as everyone in the room acknowledged. So Ms. Yellen said, "Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way."

"Other Fed members agreed, and the 2 percent target became enshrined in Fed policy, though only in a clandestine way. Mr. Greenspan did not want his hands tied. 'I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate, 'he said, according to the transcript.

It's almost as if Greenspan had a crystal ball, as he knew that if it got out that the Fed had a 2% inflation target, they would be held responsible for it and be committed to getting inflation to that level. Part of the reason the Fed got us into this mess is that inflation was too low for a long time and well below their target, so they had to try to "heat up" the economy. They also were then OK with inflation running above 2% for some time to average 2% over the long run...and boy did that backfire.

SVB/The Fed

First Citizens has bought Silicon Valley Bank's assets at roughly an 18% discount, as their bonds are not worth what SVB paid for them because rates have gone up in the current market. It raises another question, however: What about the Fed?

SVB had roughly $80 billion in assets, but the Fed has $2.6 trillion in mortgage-backed securities that it bought at much lower rates. The Fed's unrealized loss on those positions is almost $500 billion. They are also now losing money for the first time in history to the tune of about $7 billion per month because of the interest they are paying on their holdings.

The Fed is forecasting for GDP to be only 0.4% in 2023. And the latest Atlanta Fed GDP forecast is for about 3% in Q1. So that means the Fed is telling us that they expect GDP to essentially decline by 2.6% in the remaining three quarters, which implies a recession. This goes along with a lot of other recession indicators, like the Bloomberg Recession Model, the Inverted Yield Curve, and Leading Economic Indicators, all of which signal a recession in the next six months.

This Week

Tuesday: Case Shiller HPI (appreciation data), FHFA HPI (appreciation data)

Wednesday: Mortgage Apps, Pending Home Sales

Thursday: Q2 Final GDP Reading, Initial Jobless Claims

Friday: PCE (Personal Consumption Expenditures)

Technical Analysis

Mortgage Bonds have had a tough time remaining above the 200-day moving average and broke sharply beneath it this morning. Bonds are managing to find support at the 100.758% Fibonacci level, but are in oversold territory. Begin the day with a locking bias.


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