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MBS Highway Daily Updates 04/28/2023

Current position: Carefully Floating

Stocks and mortgage bonds are higher to start the day following this morning's PCE report.

PCE (Personal Consumption Expenditures) Inflation Report

The Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that inflation rose 0.1% in March, which was lighter than estimates of 0.3%. Year over year, the index declined from 5.1% to 4.2%, 0.2% better than market estimates.

The core rate, which the Fed focuses on and strips out food and energy prices, rose 0.3% last month and decreased from 4.7% to 4.6% year over year, which was in line with forecasts.

Within services, increases in housing and health care were partly offset by a decrease in food services and accommodations.

Shelter costs in the PCE continue to come in at elevated levels. They were up 0.6% in March and are up 9.6% year over year. Shelter costs have done nothing but go up, but we know that shelter costs in the real world peaked in November of 2021, which was 16 months ago. Since then, shelter costs have decelerated considerably, but this has not yet been reflected. This will catch up soon, being that the lag has now gone on for 16 months. We think it will happen in May, and once it does, inflation will make meaningful moves lower.

Apartment List Rental Report

Apartment List reported that rents rose 0.5% in April and are now up only 1.7% year over year, down from 2.6% in the previous report.

Bottom line: Home prices and rental prices have been significantly decelerating and have shown some outright declines. Yet the shelter component of the CPI is still accelerating because of how they calculated the data over the last year. This will catch up, and when it does, it will be deflationary. Right now, real-time shelter costs are only up 1.7% year over year, compared to 8.2% in the CPI report. If you were to catch this up and consider that housing makes up 43.2% of the Core CPI Index, inflation would be 2.8% lower—instead of 5.6%, it would be 2.8%. Inflation, and in turn mortgage rates, will come down. It's just a matter of time. We hope this lag starts to catch up on May 10.

Employment Cost Index

The Employment Cost Index is old Fed Chair Alan Greenspan's favorite measure of inflation, as it measures wage pressures and costs, something the Fed is highly focused on. In Q1, the index rose 1.2% on a year-over-year basis, which was 0.1% above the estimate. If you were to annualize the figure, it means that employment costs would rise 4.8% over the year, which is 0.4% above the estimate.

Next Week

Tuesday: JOLTS

Wednesday: Mortgage Apps, ADP Employment Report

Thursday: Initial Jobless Claims

Friday: BLS Jobs Report

Technical Analysis

Mortgage bonds are battling with the dual ceilings at the 100-day moving average and 100.758 Fibonacci level.

The 10-year is currently testing a floor at its 25-day moving average. Begin the day carefully floating.


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