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MBS Highway Daily Updates - 11/18/2022

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Current position: Carefully Floating

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

Existing Home Sales

Existing Home Sales, which measures closings on existing homes, showed that sales were down 5.9% in October at a 4.43M annualized pace, which was slightly stronger than expectations looking for a 7% decline. On a year-over-year basis, sales are down 28%.

Inventory has crested, as it does every time this year after the normal seasonal build and declined for the third straight month to 1.22M.

There is now a 3.3 Months supply of homes, which is tight because 4.6 months is considered normal. But if you look at active listings, there are only 754,000, which means that 38% of the "inventory" in the Existing Home Sales report is under contract and not truly available. This speaks to demand, as a normal market has 25 % of inventory under contract. When looking at the month's supply of available homes for sale, it's really 2.5 months.

Homes remained on the market on average for 21 days, up from 19 days. 64% of homes were on the market for less than 30 days.

First Time Home Buyers have accounted for 28% of sales, which was a decline of 0.1% from the previous report, but amazingly the same level as this time last year. Cash buyers accounted for 26% of sales, which increased from 22% in the previous report, while investors purchased 16% of homes, which is up from 15%. Make sure to utilize the new Investment Property tool within MBS Highway. Foreclosures and short sales accounted for 1% of all transactions, which is down from 2%.

CoreLogic Rental Report

CoreLogic reported that rents rose 10.2% year over year in September and continue to cool on a year-over-year basis from the peak in April at 13.9%. Rents are now lower year over year for the 5th straight month - We are seeing rents soften in the current market, but remember that in the CPI report the rental component is lagging. Once this catches up to what is actually happening in the current environment, this should be a deflationary component.

Fed Talk

Minneapolis Fed President, Neel Kashkari, said that he needs to be convinced that inflation has at least stopped climbing and that the Fed is not falling further behind the curve before he would advocate stopping a progression of future rate hikes... And he does not believe he is there yet. If we get another low inflation print for November, which we will get on December 12, will that be enough for him to support pausing?

We also heard from the new Voting Boston Fed President, Susan Collins, who thinks that there is more work to do to fight inflation and she believes the Fed can reestablish labor market balance with only a modest increase in the unemployment rate. She is new but equally as ignorant.

The Fed has been doing Quantitative Tightening, meaning they have stopped reinvesting the proceeds they receive from the Mortgage Backed Securities and Treasuries they have on their balance sheet. There is a lot of misinformation on this - The Fed is not selling Bonds, they are just not reinvesting. It's also important to note that even though the Fed is no longer buying or reinvesting, there is a much lower supply of MBS coming to market because volumes have dropped.

The September Treasury capital flow data came out last night and showed another month of huge buying. A net $60.4B of notes and bonds were purchased bringing the year-to-date amount to $614.6B, which is the best first 9 months ever since they started tracking in 2010 and the best quarter in 44 years.

Other central banks, including Japan, China, and the UK have been net sellers of our Treasuries and Bonds, as they try to defend their currencies. So, who is buying our MBS and Treasuries? Private buying of foreign investors has more than offset the reduction from other central banks because our Treasuries are now very attractive.

Leading Economic Indicators

And while the Fed thinks we may be able to achieve a soft landing, The Conference Board's Leading Economic Index decreased by 0.8% in October, following a 0.5% decline in September. The index has fallen for an 8th consecutive month and suggests the economy is possibly in a recession.

The senior director for The Conference Board said, "The US LEI fell for an eighth consecutive month, suggesting the economy is possibly in a recession. The downturn in the LEI reflects consumers' worsening outlook amid high inflation and rising interest rates, as well as declining prospects for housing construction and manufacturing. The Conference Board forecasts that a recession is likely to start around year-end and last through mid - 2023."

Technical Analysis

Mortgage Bonds are battling resistance at the important 100.534 Fibonacci level for the sixth day in a row. Bonds do have support at the 50 - day Moving Average if they are rejected. The 10 - year has moved back up to 3.79%, but is still beneath its 50 - day Moving Average. Begin the day Carefully Floating.


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