August 1st, 2022 - Market Update
Current position: Carefully floating
Stocks and Mortgage Bonds, after being lower in the early going, have turned positive. The 10-year is down 5bp to 2.59%!
For the longest time the Fed wanted to see higher inflation - Be careful what you wish for. The most recent reading from the CPI showed inflation at 9.1%. The Fed has been hiking rates and the Fed Funds Rate now stands in a range between 2.25% and 2.50%. Many in the markets are now thinking the Fed may begin to pause or reduce their pace, but we heard some comments from a few Fed members this morning that are contrary.
The Minneapolis Fed President, Neel Kashkari, came out and said that the Fed will continue to fight inflation, even if we are in or headed for a recession. It's interesting to see his shift - Last year he warned the Fed to not react to inflationary pressures and hike rates because inflation would be temporary. He also said three months ago that he was expecting inflation to ease.
Former NY Fed president Bill Dudley came out and said that thinking the Fed would not tighten much further is wishful thinking is both unfounded and counterproductive. He believes the Fed will focus on Inflation and not recession and that they will need to tighten much further.
The most lagging of economic indicators, the unemployment rate, has now become again the most important monthly data point, along with CPI, because it will be that rather than GDP that will more influence how much tightening the Fed has left in them.
Something else to keep an eye on that can influence inflation is oil prices. Looking at the futures markets, the price of oil is declining as the futures contracts go further out. This may look like oil prices are going to go down, but it's quite the opposite. Oil prices are in what is called "backwardation" and it speaks to the supply of oil. They are being incented to store oil into the future at lower prices because there is no supply. And the US has been tapping into the Strategic Petroleum Reserve to the tune of 1M barrels Der day, but that ends after September. This means that we could see supply suffer further, which can push oil prices back up, potentially back to $120 or $130 per barrel, which will certainly not help inflation.
It's a quiet economic news day, and relatively quiet week, besides the extremely important BLS Jobs Report on Friday. The market is anticipating 250,000 job creations in the month of July and for the unemployment rate to remain at 3.6% for the fifth month in a row.
Also of important will be Thursday's Initial Jobless Claims report, which has been edging higher consistently. While the estimates are for the unemployment rate to remain the same. we would not be surprised to see it move higher.
After a strong move higher last week and closing above the 100-day Moving Average, Mortgage Bonds testing the 100-day Moving Average as support this morning, but have since moved higher. If Bonds can remain above this level, the next ceiling is at 102.214, which is the high from May 27th. The 10-year is trading at 2.59%, in a wide range between support at 2.57% and overhead resistance at 2.79%. We do have to be on guard, as Bonds are now in overbought territory on the Stochastic Chart, while the 10-year yield is in oversold territory. Begin the day carefully floating.
Source: MBS Highway
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