MBS Highway - Daily Updates 10/24/2022

Current position: Carefully Floating

Stocks are higher and Mortgage Bonds are slightly lower to start the week.

Looking at the yield curve, the 10 - year yield minus 2 - year yield spread is around -30bp, which as we have gone over, is a reliable recession indicator. But there is another spread that is widely followed for recessions and provides even greater certainty of a recession - the 10 - year yield minus 3 - month yield. And that indicator went slightly negative last week. It has since gone positive, but the signal is in and we expect these inversions to get worse after the 75bp hike on November 2. Just another sign that a recession is coming. While a recession inflicts pain and people lose their jobs, the silver lining is that rates always decline.

Last week, Nick Timiraos, the Fed mole that writes for the WSJ, said that the Fed is going to hike 75bp in November and that they are going to debate then whether and how to signal plans to approve a smaller increase in December. This means he believes the Fed wants to hike 50bp on December 14. He explained that several Fed members, including Fed Vice Chair Brainard, have begun to signal their desire to slow down the pace of increases and stop raising rates early next year to see how their moves this year are slowing the economy. After the article, the odds of a 75bp hike in December declined from 75% to 48%.

This week is an action-packed with a lot more housing data, including fresh appreciation readings from Case Shiller and the FHFA House Price Index, New Home Sales, and Pending Home Sales. We will also get the first reading for Q3 GDP and the Fed's favorite measure of inflation, Personal Consumption Expenditures.

Within the PCE report, the Core reading is expected to rise from 4.9% to 5.2% in September on a year-over-year basis, which is going in the wrong direction - Remember the Fed has a target for this metric of 2%. While this is a negative for the Bond market, the reaction may not be too drastic, as the markets already sold off sharply to the higher Consumer Price Index core reading. But as mentioned, we expect this to start improving and moving lower in the months to come.

Mortgage Bonds are continuing to trade in a wide range between support at 96.984 and overhead resistance at 99.031. While in such a wide range like this, Bonds are susceptible to whipsaws or big price movements, so we must remain on guard. The 10 year is trading in a range between support at 4.15 and overhead resistance at 4.279%. This is also a wide range and it's important that yields remain under resistance, otherwise, they could make another run toward 4.335%. After locking most of last week, with the majority of your pipeline protected, we can begin the day carefully floating to see if Bonds can stabilize.