February 22, 2023 – Economic News

• February 22, 2023
• realestatelife
• Business & Markets, Fed, Interest Rates, Politics & Economy, Rates, Real Estate, Real Estate Finance, Recession, World News, Your Real Estate Life

MBS OVERVIEW

4:00 EST – Our benchmark FNMA MBS 6.00 March Coupon is up +17 BPS with 60 minutes left to trade.

Domestic Flavor:

Taking it to the House: Weekly Mortgage Applications tanked for the second week in a row, this time they were down -13.3%. Refinances fell by only -2.2% but Purchase Applications dropped by -18.1%.

The Talking Fed: We got the Minutes from the last FOMC meeting at 2 pm ET. You can read the official release here. Here are few key highlights (for bond traders)

• All participants agreed to continue to lower their balance sheet holdings based upon their prior announced plans.
• “few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount. The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way.”
• “Almost all participants observed that slowing the pace of rate increases at the current juncture would allow for appropriate risk management.”
• “A number of participants stressed that a drawn-out period of negotiations to raise the federal debt limit could pose significant risks to the financial system and the broader economy.”
• There was only a single mention of the word “pause” in rates — and that one is in reference to other central banks.

Treasury Dump: We had a 5 year note auction today at 1:00. $43B went off at a high yield of 4.109% with a bid-to-cover ratio of 2.48

Central Bank Palooza: As expected, the Reserve Bank of New Zealand raised their interest rate by 50BPS to 4.75%, CPI YOY 8.7% which matched expectations.

Across the Pond:

Germany: Their 10 year bund auction was dismal with the rate paid at auction jumping from 2.27% to 2.56%.

On Deck for Tomorrow: Revised 4th QTR GDP, Initial Weekly Jobless Claims, 7 year Note auction.

FOMC minutes continued to anticipate further increases in borrowing costs would be necessary to bring inflation down to their 2% target. While higher rates may be likely the FOMC still held that the pace of the increases should slow going forward. Keep in mind the minutes are three weeks old, and recent economic releases have shown the economy not slowing. “Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time.” The minutes indicated some members thought that a less than aggressive attack to cool inflation could stall recent progress on moderating inflation pressures. The minutes implied that the Fed is more concerned about inflation than pushing the economy into a recession. “Participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook, and that maintaining a restrictive policy stance until inflation is clearly on a path toward 2% is appropriate from a risk-management perspective.”

The initial reaction to the minutes swap traders continue to expect rate increases in March, May, and June meetings. The expectations now are the FF rate will peak at 5.36%, up from 5.1% a few days ago (5.25% FF rate from 5.0%last month). Since the meeting, the economy has shown more momentum than FOMC members saw then. While inflation is slowing, it isn’t slowing rapidly enough to suit the Fed, thus the takeaway is the Fed isn’t going to let up. Those that do the forecasting revised their outlook for PCE inflation and CPI for every quarter through the first half of next year. The metric is now seen averaging 2.4% on an annual basis in mid-2024 compared to 2.3% last month.

The $43B 5 year note auction this afternoon met with mediocre demand, not much different than the averages over the last 12 5 year note averages, indirect buyers took 69.9% compared to 4.4% average.

Tomorrow weekly jobless claims (200K from 194K), the second read on Q4 GDP, the same as the advance a month ago, 2.9%. Treasury will round out the borrowing tomorrow wit a 7 year note auction. Its Friday when key data will be reported, Jan m/m PCE (+0.4% from +0.1%, year/year +4.9% from 5.0%). Jan personal income +1.0% from +0.2%, personal; spending +1.2% from -0.2%.

The bellwether 10 year note tested its key level at 3.90% prior to the FOMC minutes, inching down to 3.90% from 3.96% early today, by 4 pm though back to 3.93% -3 bp from yesterday. That said, with more inflation news coming on Friday and no unrealized MBS price improvement we will continue to lock and avoid risk.