Current position: Carefully Floating
Stocks and Mortgage Bonds are both higher to start what we believe will be a Bond friendly week. The highlights will be tomorrow's Consumer Price Index report for November, and Wednesday's Fed Statement and Jerome Powell Press Conference.
Later this afternoon at 1:00 pm ET there will be a 10 - year Bond Auction. This auction will be important and could give us some clues on expectations for tomorrow's inflation data. If it's a strong auction, investors may want to lock in 3.5% 10 - year yields because they believe that inflation and rates will turn lower tomorrow and into the future. This would allow them to lock in a good return and gain capital appreciation when rates move lower because 10 - year yields in the going market would be lower than their 10 - year Treasury, which will garner them a premium in the market and make their Treasury more valuable.
What to Expect from CPI
The economy has clearly been slowing and there are flashing signs of a recession all over. We were correct in believing that core inflation would start to roll over on November 10, when we received the October reading, because of these slowing signs and tougher comparisons from last year. For that same reason, we think we will continue to see inflation move lower, and rates continue to follow.
Remember, CPI is a rolling twelve-month report. If you add the previous 12 monthly readings and account for rounding and compounding, you will come up with the year-over-year figure. The previous report showed headline or all-in inflation at 7.7%, and core inflation, which strips out food and energy prices and is the main focus of the Fed, was at 6.3%.
When we receive the monthly November core reading tomorrow, it will be replacing the November reading from 2021, which was another high comparison of 0.5%. That means that any monthly reading below that will cause the year-over-year figure to decline. The market is expecting 0.3%, and when replacing 0.5% from last year, it would translate to a 0.2% drop or 6.1% year over-year number. This is likely and will be welcome news for the Bond market.
The Fed
If CPI comes in lower, as we anticipate, the Fed may have to acknowledge two cooler CPI reports, a softer PCE (Personal Consumption Expenditures) inflation report and slowing producer inflation (PPI).
The Fed is going to hike 50bp on Wednesday, but the tone of their statement and Powell's press conference will be critical. If the Fed sounds less hawkish and says that their rate hikes have been working, albeit they have a lot more work to do, the markets could celebrate with a relief rally.
CoreLogic Q3 Equity Report
CoreLogic released their Q3 Home Equity report, showing that 37% of homes are owned free and clear. And those with a mortgage saw equity grow almost 16% since last year. The average home equity gained over the past year is $34,000. Mortgaged properties with negative equity increased slightly from Q2, but are still down 9.8% from last year - Only 1.9% of mortgaged properties have negative equity, down from 2.2% last year. For reference, negative equity during the housing bubble was around 25%.
Technical Analysis
Mortgage Bonds are trading in a narrow range between support at 100.534 and overhead resistance at the 100 - day Moving Average. The 10 - year is also trading in a narrow range between support at 3.50% and overhead resistance at 3.60% and managed to remain under the falling trend line that has been in place since November 8. This afternoon's 10 - year Auction will likely be the catalyst and determine which way Bonds breakout. Begin the week Carefully Floating.