Current position: Carefully Floating
There will be a bond coupon rollover after the close of the market today. This occurs each month because mortgage bonds are finite. They have an end term, such as 30 years. Therefore, each month, a new 30-year period begins. This new 30-day extension is reflected in an adjusted rollover price. This rollover does not impact your pricing.
Stocks are slightly higher and mortgage bonds are lower so far this morning.
Admitting there is a Problem is the First Step
Yesterday, NY Fed President and always-voting member John Williams said, "I personally don't think it was the case that the pace of rate increases was really behind the issues at the two banks back in March." "I think it's well understood that there were some pretty idiosyncratic, specific issues with those institutions."
While it's true that banks are partly to blame, the Fed has to realize that they created this huge inflation problem by being too accommodative for far too long, failed to realize it, and now they are creating another mess by not realizing inflation is going down but looking at lagging indicators. The Fed's unprecedented pace of rate hikes gave depositors a better alternative, which caused stress on banks as their deposits fell.
But this is the problem at the Fed: They look at old data and cannot improve if they cannot admit they made a mistake. The Fed is now making another mistake by continuing to hike rates, even though the economy is showing signs of cracks and inflation is coming down. They are just looking at lagging data and need to be patient.
Tomorrow's Consumer Price Index
Tomorrow's CPI inflation report will be very important for the markets... And it will likely be a bifurcated report. There are two components, the headline "all in" inflation number and the "core rate," which strips out food and energy prices.
While they are both important, the Fed focuses more closely on the core rate because they feel that is what they can control with their monetary policy-if there is bad weather, oil production cuts, etc., the Fed can hike all they want and not impact those prices.
The market is expecting headline inflation to fall sharply from 6% to 5.2% but for core inflation to increase from 5.5% to 5.6%. We expect tomorrow's market action to be volatile, and it depends on which part of the report the markets focus on—overall inflation or core inflation.
Car Loans
The auto industry has been hit hard by the aggressive pace of Fed rate hikes. CarMax, which just reported earnings, explained that their sales were significantly impacted by affordability issues as monthly payments are surging—almost 17% of monthly car payments are above $1,000, compared to only 6% two years ago. This is a record high. The Fed's rate hikes are clearly having an impact and will continue to slow the economy as those with car loans have much less discretionary dollars for other things.
Small Businesses Optimism...or Lack Thereof
The NFIB Small Business Optimism Index continued to weaken in March, falling to a reading of 90, which is just off a 10-year low.
Looking at some of the internals:
Plans to hire fell to their lowest level since November 2016, not including COVID.
The two compensation components, both current and future, were lower and point to lower wage-pressured inflation.
Those that expect a better economy held at -47%, just a few points from a record low.
Adding to this weakness was a downward revision from the Atlanta Fed on Q1 GDP; they were initially expecting 3.5% growth in Q1, which was revised lower to 2.2% over the last two weeks.
MBS Highway Housing Survey
The MBS Highway housing survey improved for the fourth month in a row. All three categories saw survey record highs since housing peaked in June.
We are starting to see an inflection point on pricing pressures: the amount seeing price increases is surpassing that seeing price decreases.
Additionally, there is rapid improvement in the west and northwest, the regions that were hardest hit in terms of pricing pressures. Our survey coincides with some of the appreciation reports we have been seeing, also showing a turning point in housing.
Technical Analysis
Mortgage bonds are lower, testing support at the 25-day moving average, with the 50-day nearby. The negative crossover on the stochastic momentum indicator is also of some concern. After locking yesterday, we can carefully float to begin the day.
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