Current position: Carefully Floating
Stocks are mixed, and mortgage bonds are trading near unchanged levels so far this morning.
The recent activity in the MBS market has been frustrating as of late. We have seen inflation come down, and the shelter numbers, as of the May 10 inflation report, are finally below where they were last year, but rates have not improved. Why?
Supply and Demand for Mortgage Bonds: The FDIC assumed $114 billion in Treasuries and MBS after SVB and Signature went under, and they have been selling those assets, adding selling pressure to bonds. Additionally, banks have been selling their bonds in an attempt to raise capital for depositors, who are taking their money and investing it in better options like treasuries and money market accounts.
This is the opposite of what we saw in 2021. Back then, inflation was moving higher, which would have caused mortgage rates to move higher. But they didn't because the Fed was doing so much buying of MBS and Treasuries. Today, inflation is heading lower and has made meaningful progress, which would cause rates to decline, but they haven't because there is a lot of selling from the FDIC and banks. Additionally, the debt ceiling uncertainty is not helping.
This will be temporary, and the sales will be exhausted, but we have to weather the storm for now. Once it's over, the fundamentals will take over, and inflation is on its way down.
The Fed
Even though Fed Presidents Bullard and Logan want another hike, we heard from Fed Chair Powell on Friday, who said that rates may not need to rise as high given credit stress. This sets up a potential pause at the next meeting. The current odds of a rate hike moved back down to 20% on June 14.
Kashkari said it could go either way for a pause at their next meeting, but even if they do, they should not signal they are over and they should remain data dependent. He also said if the Fed doesn't reach 2%, they lose all credibility.
The problem is the Fed is looking at old data, and we know when it gets to 2%, inflation will be much lower. This is the same reason we got into this inflation mess: in 2021, the CPI only showed 1.5% inflation, but real inflation was much higher as shelter costs skyrocketed by 15%. But that was not captured due to the lag. If the Fed had started hiking sooner and stopped buying MBS and Treasuries, we would have likely avoided all of this.
This Week
Tuesday: New Home Sales
Wednesday: Mortgage Apps, Fed Minutes
Thursday: Initial Jobless Claims, Q2 GDP, Pending Home Sales
Friday: PCE Inflation, Durable Goods Orders
Technical Analysis
Mortgage bonds continue to test important support at 99.845, which has held for the last few days.
The 10-year is trading in a wide range between support at 3.644% and overhead resistance at 3.786%. One positive: the stochastic charts are getting close to reversal points on both MBS and Treasuries. With support holding for now on MBS, begin the day carefully floating.
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