MBS Highway Daily Updates 04/14/2023
Current position: Carefully Floating
We will be hosting a webinar with John Mauldin, who is one of the most brilliant economists in the world, on Monday at 1:30 p.m. ET to discuss the economic outlook. You can register HERE.
Stocks and mortgage bonds are both lower to start the day on some comments from Fed Governor Waller, expressing that he wants to hike rates again.
Fed Governor Waller said he wants to hike again this morning because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target.
He is so far off base and looking at old data. We are seeing cracks in the labor market. Initial Jobless Claims have been rising sharply since the beginning of the year, and job openings have been moving much lower. The unemployment rate is low at 3.5%, but we do not get a recession when the unemployment rate is high, but rather when the unemployment rate reaches its lowest point and begins to rise.
On inflation, we have seen consumer inflation drop from 9.1% to 5% and producer inflation drop from 11.7% to 2.7%. Inflation does not move lower overnight, and shelter costs are still lagging. The Fed is getting what they want; they just have to be patient.
Lastly, financial conditions are tightening. Remember, the banking crisis just happened a little over a month ago and will result in less lending and a slower economy, but it will take some time.
We don't know what Waller is looking at, but the Fed runs into problems because they are constantly looking in the past and dictating their monetary policy based on what has already happened, not what is currently happening or what is going to happen.
During the Pause
The odds are for the Fed to hike one more time by 25bp next month, followed by a pause. But the question is, what happens to stocks, bonds, real estate, and other asset classes once the Fed is done hiking?
Our good friend, David Rosenberg, looked at the last 50 years of history to see how different asset classes performed from the Fed's last rate hike to the first rate cut—the pause period. Historically, we have seen a 43 bps decline over the past 10 years, which would be good for mortgage rates. Additionally, real estate performs very well.
Retail Sales & Industrial Production
Retail sales in March fell 1%, which was much worse than the expected 0.4% decline. However, core retail sales, which strip out automobile sales and gas, fell 0.3%, which was stronger than the 0.5% decline expected. The stronger core sales are partly weighing on the bond market today.
Industrial production, or the output of the industrial sector of the economy, including manufacturing, mining, and utilities, increased 0.4% in March, which was double the estimates of 0.2%. Factory capacities were expected to decline to 79% but rose to 79.8%. This shows that factories are at greater capacity than expected and could be inflationary. This also put some pressure on the bond market.
Monday: NAHB Housing Market Index
Tuesday: Housing Starts and Permits, Fed's Beige Book
Wednesday: Mortgage Apps, 20-Year Bond Auction
Thursday: Initial Jobless Claims, Existing Home Sales
Mortgage bonds are trying to remain above a triple floor of support, formed by the 25-day moving average, the 100-day moving average, and the 100.758 Fibonacci level. The 10-year is up against the 200-day moving average, which is preventing yields from moving higher for now. Begin the day carefully floating.