Listen Live
Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
Listen Live
Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
MBS OVERVIEW
Domestic Flavor:
Taking it to the House: Weekly Mortgage Applications were flat at 0.5%. Refinances were down -2.1% and Purchases were up 1.5%.
The Talking Fed: Fed Chair Powell will give his Semiannual Monetary Policy report to the Committee on Financial Services in the House today at 10 am ET. We already have his prepared report. You can read it here. Here is a key quote from his testimony: “In light of how far we have come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, the FOMC decided last week to maintain the target range for the federal funds rate at 5 to 5-1/4 percent and to continue the process of significantly reducing our securities holdings. Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year. But at last week’s meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy.” Separately, we will also hear from Cook, Jefferson, Goolsbee and Mester.
Treasury Dump: We have an important 20 year Bond auction at 1 pm.
Across the Pond:
UK: Inflation was hotter than expected, right before tomorrow’s BofE interest rate decision.
Interest rates declined 5 bps yesterday, this morning up 5 bps and MBS prices -16 bps in early trading. US stock indexes in pre-opening trading were slightly lower.
The only report today, weekly MBA mortgage applications; apps were up 0.5%, purchase apps +1.5%, re-finances -2.1%.
The main event today, Jerome Powell’s testimony to the House Financial Services Committee starting at 10 am ET. His prepared remarks saying the Fed policymakers expect interest rates will need to increase to defeat inflation, and added it depends on incoming data which has been the case for a year now. “My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal”… “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks” … “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” Powell said. “Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions”… “In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, we will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Powell is expecting a period of below trend growth as rates increase.
Powell will face tough questions at his testimony today and tomorrow at the Senate. The Fed and other central banks run risks that increasing rates may turn the economies into recession. So far, the consensus from economists and Wall Street is if there is a recession it won’t be much and won’t last long.
At 9:30 am the DJIA opened -83, NASDAQ -49, S&P -14. 10 year at 9:30 am 3.76% +4 bps. FNMA 6.0 30 year coupon -23 bps from yesterday’s close and -28 bps from 9:30 am yesterday.
Tomorrow the Bank of England is expected to increase its base rate by 50 bps.
Over the last two weeks there has been little change at the long end of the curve, the 10 at 3.76% this morning has tested 3.84% five times since May 26th, each time it backed away. At the short end, the 2 year note yield continues to increase, as well as the T-Bill rates suggesting the Fed isn’t finished and inflationary pressures remain elevated. Is the Fed finished as we believe, or is there one more increase in the future at the July FOMC meeting (July 26th)? No clues this week but a week from this Friday the next inflation report with the May PCE inflation data, next week’s calendar has more meat on the bone for traders and economists (Q1 GDP, consumer confidence from the Conference Board, U. of Michigan consumer sentiment, durable goods orders). Also, next week Treasury auctions (2s, 5s and 7s).
We floated yesterday; we will begin today floating. Yesterday the 10 year note declined 5 bps but MBS prices were essentially unchanged, this morning the 10 +6 bps and MBSs down 23 bps. Taking on risk doesn’t reap the rewards we expect.
