January 18, 2023 – Economic News

• January 18, 2023
• realestate

MBS OVERVIEW

4:00 EST – Our benchmark FNMA MBS 6.00 February Coupon is up +25 BPS with 60 minutes left to trade.

Taking it to the House: Weekly Mortgage Applications shot up by 27.9%. Refinances rocketed up by 34.2% and Purchases were up 24.7%. The January NAHB Index came in at 35 instead of 31

Retail Snails: Headline December Retail Sales cratered by -1.1% vs. est. of -0.8% and November was revised lower from -0.6% to -1.0%. Ex- Autos, they were also down by -1.1% vs. est. of -0.4%.

Inflation Nation: The December headline PPI was very weak on a MOM basis, dropping by -0.5% vs. est. of -0.1%. YOY, it was up 6.2% which is much lower than November’s pace of 7.3%. Core (ex food and energy PPI) matched expectations at +0.1% on a MOM basis and up 5.5% vs. 5.9% on a YOY basis.

Treasury Dump: We had a 20 year Treasury bond auction today at 1:00. $12B went off at a high yield of 3.678% with a bid-to-cover ratio of 2.83

The Talking Fed: We got the Beige Book this afternoon which is prepared just prior to the next FOMC Meeting. You can read their official release here. Here are a few key points:

• Employment continued to grow at a modest to moderate pace for most Districts. Only one District reported a slight decline in employment, and one other reported no change in employment levels.
• Housing markets continued to weaken, with sales and construction declining across Districts.
• Retailers noted that high inflation continued to reduce consumers’ purchasing power, particularly among low- and moderate-income households.
• Many retailers noted increased difficulty in passing through cost increases, suggesting greater price sensitivity on the part of consumers.
• Manufacturers indicated that activity declined modestly on average, and, in many Districts, reported that supply chain disruptions had eased.
• Tourism contacts reported moderate to robust activity augmented by strong holiday travel.

Philly Fed President Harker said that he expects the Fed to raise rates a few more times this year, but that in his view, “hikes of 25 basis points will be appropriate going forward.”

Central Bank Palooza: The Bank of Japan kept their key interest rate at -0.1% and Japan’s policymakers doubled down on defending their stimulus, defying intense market speculation.

On Deck For Tomorrow: Peoples Bank of China Interest Rate Decision, Housing Starts and Building Permits, Initial Weekly Jobless Claims and the Philly Fed Manufacturing Index.

Inflation shouldn’t be a problem for the economy, but it is for the Fed, inflation readings today on Dec PPI were even lower than the low forecasts, manufacturing is slowing quickly yet the Fed doesn’t see any reason to back down from the plan to increase the Ff rate by another 50 bps over the next two FOMC meetings. The Fed’s Beige Book out this afternoon, “Selling prices increased at a modest or moderate pace in most districts, though many said that the pace of increases had slowed from that of recent reporting periods,” … “On balance, contacts across districts said they expected future price growth to moderate further in the year ahead.” The survey showed that employment continued to grow at a modest-to-moderate pace in most districts. “Many firms hesitated to lay off employees even as demand for their goods and services slowed and planned to reduce headcount through attrition if needed,” the survey stated. “With persistently tight labor markets, wage pressures remained elevated across districts, though five Reserve Banks reported that these pressures had eased somewhat.”… “On balance, contacts generally expected little growth in the months ahead,” according to the Beige Book.

The 10 broke below key chart support at 3.40% to 3.38%. MBS prices started strong this morning on PPI and retail sales then lost most of the gains before catching a bid late this afternoon. Several lenders repriced lower from initial pricing.

St. Louis Fed pres. James Bullard commented the Fed should keep on rapidly raising interest rates until they get above 5% in order to prevent a return of inflationary pressures. He said he sees a central bank policy rate of between 5.25% and 5.5% at the end of the year. “We want to err on the tighter side to make sure we get the disinflationary process to take hold in the economy and push inflation back to the 2% target.” Officials “should move as rapidly as we can” to raise the policy rate above 5%.“Once you get there, say, OK, we’re going to react to data.”

Inflation is declining since last fall and the outlook remains mushy. Crude oil has been increasing recently driven by China’s reemergence from COVID lockdowns. As inflation fears ebb the long end of the curve should find support at these levels while at the short end will continue to feel the pressure of increasing rates. The 3 mo. T-Bill at 4.65% 1,87 bps higher than the 10 yr., the 2 yr. recently found a little support, a week ago the spread was 1.08% higher than the 10, today 0.71%.

Tomorrow Dec housing starts and permits (starts 1.362 mil from 1.427 mil, permits 1.380 mil from 1.342 mil. Weekly jobless claims (215K from 205K). Jan Philadelphia Fed business index (-10.3 from -13.8 in Dec).

The stock indexes got hit today on very weak Dec retail sales, indicating slowing and helped the rate markets decline.

While the 10 yr. note held its lowest levels all day, MBS prices saw selling after 9:30 am this morning, several lenders re-riced lower. We locked before most re-pricing but got caught with a few rate locks. The 10 at critical chart support at 3.40%, will it push below it, with inflation slowing the momentum is there but I want to see what happens tomorrow. Long rates are choppy, any increases in rates won’t be much. We locked all loans that didn’t suffer re-pricing, will hold those with current losses.