Current position: Carefully Floating
Stocks and Bonds are both lower to start the week. Mortgage Bonds are giving up some of their gains from last week, but are still up significantly in that period of time. Initially, after Friday's Jobs Report, Bonds fell sharply, but as we had mentioned, we thought they would recover as the markets digested the true weakness within the report, when looking past the headline. The Market erased a 90bp loss and ended the day 9bp or higher. Remember, since November 10, which is the turning point in CPI inflation we forecasted, rates have come down 1%. And while our target is 5% in the first part of next year, it will not all happen at once.
Weakness in Friday's Jobs Report
Looking deeper into the report, the headline job creation number of 263,000 was much stronger than estimates... but there is a lot of modeling within the business survey. It accounts for things like the birth and deaths of businesses and makes estimations on how many jobs would be created. In Friday's report for November, this totaled 110k, which we think overestimated job gains by a long shot.
Additionally, hours worked were cut by 0.3%, and if you extrapolate that out to how many jobs it would mean, it's roughly 380,000 that would have been lost.
Lastly, there were 165,000 jobs that were created from multiple job holders, which definitely double counted many of the jobs.
The Household Survey, which eliminates some of what is mentioned above, showed 138,000 job losses.
Once the market figured this out, we saw Bonds recover.
Money Supply
Hat tip to our friend Charlie Bilello for sharing some interesting charts this morning.
Inflation can be defined as too many dollars chasing too few goods. And the main reason for the 40 - year high inflation we have seen is the money supply, which exploded higher by 40% in 2020 and 2021.
But it's now moving in the opposite direction - Then money supply has decreased 1.5% over the last 7 months, the largest decline over a 7 - month period on record going back to 1959.
Since 1959, the US Money Supply has gone up each and every year, with the 0.3% increase in 1994 the smallest, and the 25% increase in 2020 being the largest. 2022 is on pace to be the first calendar year in which the Money Supply has fallen in the last 60+ years, down 0.3% YTD. This will translate to lower inflation and lower mortgage rates.
Week Ahead - Notable Economic Data
Wednesday: Mortgage Applications
Thursday: Initial Jobless Claims
Friday: Producer Price Index (Wholesale Inflation).
Technical Analysis
Mortgage Bonds are moving lower today and have tested support at the 100 - day Moving Average, which is holding. The 10 - year Treasury yield is battling with overhead resistance at 3.57%, with the next ceiling at 3.67% if 3.57% doesn't hold. We want to remain patient, especially with the CPI inflation report for November due to be released next week. As previously stated, we think rates will continue lower one piece at a time, with the next one potentially being the November CPI. Begin the day carefully floating.
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