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Listen Live
Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
MBS OVERVIEW
3:00 EST – Our benchmark FNMA MBS 6.00 January Coupon is down -11 BPS with 120 minutes left to trade.
The Talking Fed: Fed Chair Powell spoke about the independent role of Central Banks today at 9 am but did not address Fed economic policy, rates, etc.
Optimism? The December NFIB Small Business Optimism Index was anything but. It dropped from 91.9 to 89.8
Treasury Dump: We kicked off three days of dumping our debt into the marketplace with your shorter term 3 year note auction at 1. $40B went off at a high yield of 3.977 and a bid-to-cover ratio of 2.84
On Deck for Tomorrow: 10 year Treasury note auction, Monthly Bond Coupon Rollover, Weekly Mortgage Applications and Atlanta Fed Business Inflation Expectations.
Interest rates bumped up today on comments from pundits that the Fed is essentially lost and comments from Fed officials that rates may have to move above the 5.0% FF rate that is the current consensus (4.25%-4.50% presently). Powell spoke this morning but nothing to sink teeth into regarding rates, talked about climate changes saying it isn’t the Federal Reserve’s purview to be involved in the discussion or policies.
Fed Governor Michelle Bowman the latest to share her thoughts. “In recent months, we’ve seen a decline in some measures of inflation, but we have a lot more work to do, so I expect the FOMC will continue raising interest rates to tighten monetary policy, as we stated after our December meeting,” Recently most every Fed official that has offered up their outlook that the Fed has more to do to cool and get inflation under control. This morning according to Frederic Leroux, Carmignac, “Inflation is here to stay,” said in a phone interview. “After the crisis central bankers thought they could decide the level of interest rates. In the past two years they realized they don’t: inflation does.” The FOMC meets on Feb 1st with debate whether it will be 25 or 50 bp increase. At the last FOMC meeting in Dec economic projections released at the meeting showed that 17 out of 19 Fed officials see rates rising above 5% this year. No policymakers expect to cut interest rates in 2023.
Another key voice to add to the uncertainty; Jamie Dimon, JPMorgan Chase told the Fox Business channel this morning that the central bank should go to the 5% rate and then take a pause. He said that would let bankers and economists see how the economy is reacting and if inflation is easing. Dimon said the pause may reveal there’s more work to do. “Inflation won’t quite go down the way people expected,” he said. “But it will definitely be coming down a bit.” If that’s the case the Fed could start increasing rates in the fourth quarter, he said. “Is it 5%? My view is it may very well be 6%”
Traders now awaiting the next inflation read on Thursday when Dec CPI is released; the present estimates: m/m CPI 0.0% down from 01.%, yr./yr. 6.6% down from 7.1% in Nov, the core, ex food and energy, m/m +0.3% from +0.2%, yr./yr. 5.7% from 6.0%. Inflation has been steadily declining since last summer.
Tomorrow MBA mortgage apps at 7:00 am; at 1:00 pm $32B 10 yr. note auction.
This afternoon Treasury sold $40B of 3s. Another good auction: in WI trading it traded at 4.000%, at the auction 3.977%. The demand strong, the cover 2.84 compare4d to the average of 2.50; indirect bidders (foreign investors) took 69.5% compared to the average of 59.0%. The strong demand driven by the recent weakness of the US dollar.
We held locks yesterday, took a small hit today. We want to lock now ahead of the CPI on Thursday. Still believe rates will slip lower to test the support for the 10 yr. at 3.40%, but with recent remarks we have reported on, it may be dicey if inflation is lower than the forecasts.
Rosie the Riveter: We got a rare surprise to the upside as the December Richmond Fed Manufacturing Index eked out a small gain of +1.0 vs. est. of -4.0
Treasury Dump: We had our 5 year note auction today at 1:00. $43B went off at a high yield of 3.973% and a bid-to-cover ratio of 2.46
On Deck for Tomorrow: Weekly Mortgage Applications, Initial Weekly Jobless Claims, 7 year Treasury note auction.
Thin trading and a waste of work this week. Interest rates continue to crawl higher worrying about inflation emerging out of China as it opens the doors from country-wide lock downs. Every minute must have a reason, this one is that China letting people loose will spread COVID again; in Milan 50% of passengers on two flights to Milan from China were found to have the virus. Trading activity down 20% today, below its 30 day average, not unusual for this week.
November pending home sales fell for the sixth month, higher rates. Sales fell 4.0% the lowest outside of the pandemic in data back to 2001. Consumers rate current home-buying conditions as the worst since the early 1980s, according to a survey by the University of Michigan. That said, mortgage rates have been retreating after spiking to a two-decade high earlier this year. Year-over-year, pending transactions dropped by 37.8%. The Northeast PHSI slipped 7.9% from last month to 63.3, a drop of 34.9% from November 2021. The Midwest index decreased 6.6% to 77.8 in November, a fall of 31.6% from one year ago. The South PHSI retracted 2.3% to 88.5 in November, fading 38.5% from the prior year. The West index dropped by 0.9% in November to 55.1, retreating 45.7% from November 2021.
Treasury sold $43B of 5s this afternoon, not as strong in bidding and demand as the 2 yr. yesterday. In WI trading prior to the auction 3.965%, at the auction 3.973%. The cover 2.46 compared to the average of 2.41%. Tomorrow $35b of 7s go on sale.
Carrying on with little economic news this week, weekly claims tomorrow expected 222K from 216K the week before.
