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MBS Highway - Daily Updates 10/25/2022

Current position: Floating

Stocks are lower and Mortgage Bonds are sharply higher to start the day.

The October Purchasers Manufacturing Index ( PMI ) declined from 49.5 to 47.3 and remained below 50 for a 4th straight month. It's important to note that the level of 50 is the middle point between expansion and contraction. New orders fell back below 50, largely due to a drop in foreign client demand, likely due to a stronger dollar, while Employment fell below 50 for the first time since June 2020. Production did rise slightly above 50 as firms noted easing supply chain pressures and the delivery of some key inputs.

In housing news, the National Case - Shiller Home Price Index, which is considered the "gold standard" for appreciation, showed home prices fell 1.07% in August, but increased by 13% year over year, which is a decline from the previous reading of 15.6% in July. While the national index did show a month-over-month decline, most of the decline was seen in some of the larger cities like San Francisco (-4.3%), Seattle (-3.9 %), San Diego (-2.8 %), LA (-2.3 %), and Denver (-2.3 %). When removing these cities that were overheated, most markets are relatively flat.

The FHFA (Federal Housing Finance Agency) released its House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Different than Case Shiller, it does not include cash buyers or jumbo loans. The FHFA reported that prices fell 0.7% in August and are up 11.9% year over year, which is a decline from 13.9%.

The MBA released their forecasts, they feel that origination volume will come in between $2.2T to $2.3T this year. They also believe that the US will enter a recession in the first half of 2023 and that mortgage rates will decline to near 5% next year.

When looking at the spread between 30 - year Mortgage Rates and the 10 - year Treasury, it has widened to levels we have not seen since March of 2020 and December of 2008. In both of these previous instances, Mortgage Rates declined significantly in the year following.

Mortgage Bonds are continuing to trade in a wide range, but are rallying sharply and have room to go until reaching resistance at 99.03 and the 25 - day Moving Average. The 10 - year has broken beneath 4.15% and is now at 4.07%. Now that the floor has been broken, there is room for things to improve until reaching 4%, followed by 3.87%. We hope that the rally in Bonds continues. Continue floating.

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