January 26, 2023 – Economic News

• January 26, 2023
• realestate

MBS OVERVIEW

4:00 EST – Our benchmark FNMA MBS 6.00 February Coupon is down -1 BPS with 60 minutes left to trade.

Taking it to the House: December New Home Sales hit 616K units on an annualized basis vs. est. of 617K, it was a slight improvement over November’s annualized pace of 602K units thanks to falling mortgage rates.

Jobs, Jobs, Jobs: Initial Weekly Jobless Claims surprised to the downside, up only 186K vs. est. of 205K. The more closely watched 4 week moving average dropped to 198K. Continuing Claims were 1.675M vs. est. of 1.675M.

Rosie the Riveter: December headline Durable Goods Orders were much stronger than expected, 5.6% vs. est. of 2.5%. Ex Transportation it was down -0.1% vs. est. of 0.0%. Ex Defense, it was up 6.3% vs. est. of -0.1%. Much of the gains in the headline reading were due to massive airline orders (Boeing).

GDP: The preliminary 4th QTR GDP was better than expected, 2.9% vs. est. of 2.6%, but the Price Index was higher than expected, up 3.5% vs. est. of 3.3%. But this is not as good of a report as the headline might suggest. It was largely driving by increases in inventory investment, consumer spending, government spending, and business investment that were partly offset by decreases in housing investment and exports. Real Final Sales to Private Domestic Purchasers – which strips out things like trade and inventories- we get a far worse number of just 0.2% in Q4. This was the lowest print since the covid crash!

Treasury Dump: We had a 7 year note auction at 1:00 and just like the 2 and 5 year auctions this week, this was very strong. $35B went off at a high yield of 3.517% with a bid-to-cover ratio of 2.69

On Deck for Tomorrow: Its a BIG Day! We get the Fed’s key measure of inflation, PCE as well as Pending Home Sales and UofM Consumer Sentiment.

The coil continues to tighten, the 10 year note for seven sessions has traded between 3.39% and 3.53%, MBS prices have had a range of 54 bps. It isn’t going to last much longer before those narrow ranges break out, which way we may know tomorrow, or at the latest next Wednesday. The 10 holding 3.40% on the downside and 3.53% on the high side. Tomorrow a key inflation release with Dec personal consumption expenditures (PCE).

Inflation is declining, and is support for long dated fixed income investments, the kiss of death or long-term interest rates. The short end will take the hit the most, increasing warehouse costs. Our focus is mainly at the long end as it impacts mortgage rates. Tomorrow’s 8:30 release of Dec personal spending and PCE, already with low forecasts on inflation, must be authenticated by the data or the 10 year yield will increase; if inflation is weaker than the estimates the 10 will break below the tight trading range and mortgage rates will slip. A breakout will set the next target to 3.35% or lower. If it were not for the FOMC next Wednesday, the improvement would be better.

The Fed will increase the FF rate next Wednesday, how mortgage rates will perform is predicated on how the FOMC frames its policy statement and Jerome Powell’s press conference. There is growing chatter from analysts, Wall Street firms, investment houses that after the 25 bps the Fed may end its increases. Powell and most all other Fedsters still clinging to the Fed’s mantra for 2.0% inflation that a few are bold enough to say the Fed may change its inflation target to 3.0% but don’t believe that.

Beside inflation data tomorrow, the U. of Michigan’s January consumer sentiment index is expected at 64.6 unchanged from the mid-month report.

Also, tomorrow Dec pending home sales, contracts signed but not closed yet; estimates are a decline of 0.1% after declining 0.4% in November.

Sales of new single-family houses in the US increased 2.3% month-over-month to a seasonally adjusted annualized rate of 616K in December of 2022, the highest value in four months, compared to market forecasts of 617K. Sales soared in the Midwest (35.2% to 73K) and the South (6.5% to 392K) but fell in Northeast (-19.4% to 29K) and the West (-15.3% to 122K). The median price of new houses sold was $442,100 while the average sales price was $528,400. There were 461,000 houses left to sell, the same as in November corresponding to 9 months of supply at the current sales rate. Considering full 2022, an estimated 644K new homes were sold, 16.4% below the 2021 figure of 771K, and the lowest levels in four years, due to rising mortgage rates. source: U.S. Census Bureau

Treasury sold $35B of 7 year notes this afternoon. The weakening dollar is driving foreign buyers to treasuries, another strong auction. The rate 3.517%, in WI trading 3.538%. The bid/cover 2.69 compared to the average of 2.48; indirect buyers, foreign investors took 77.1% compared to 66.2% average over the last 12 7 year auctions. Once again domestic buyers lagged, taking 16.8% against the average of 20.5%. The auction left dealers having to take 7% of the total, not much.