August 15th, 2022 - Market Update
Current position: Carefully floating
Stocks are lower and Mortgage Bonds are higher to start the week.
Richmond Fed President, Thomas Barkin, spoke and said that the Fed needs to keep hiking until we see 2% for three months. He is speaking to Core PCE (Personal Consumption Expenditures) which is currently at 4.8%.
It will likely be difficult to get Core PCE to 4.8%, but to keep hiking while it's at 2% for three months, means that the Fed will overshoot their tightening...which is something they always do.
All of the Fed members are talking tough, and Barkin is the latest. The Fed is the epitome of driving while looking in the rear view mirror.
Remember how quickly the Fed can change their tune - it wasn't that long ago that the Fed said that it was too early to hike rates.
While almost every other central bank is tightening their monetary policy and hiking rates, the PBOC (People's Bank of China) cut their version of the Fed Funds Rate 10bp.
This comes on the heels of weaker economic data and trying to stimulate their economy following their Covid Zero policy lockdowns. Once the US sees weakness in the economy will they flip flop and go the other way?
Shipping inflation may have peaked - According to Cass Freight, freight rates increased 28% year over year, but declined almost 4% in July. Shipments are up 0.4% year over year and are down almost 2% month over month, signaling some freed-up supply.
This can help to reduce inflation - Here is a quote from Cass Freight - "We're coming into this peak season with much more free capacity. I think that's going to be a good thing from a cost perspective for those big retailers who have been struggling with a lot of cost inflation."
NY Manufacturing takes a nosedive - The August NY manufacturing index collapsed to -31.3 from +11.1 and well worse than the estimate of +5.
That's the weakest since May 2020 when it was at -48.5 and the second largest monthly decline on record. New orders went from +6.2 to -29.6. Shipments dropped by almost 50 pts to -24.1.
The NAHB Housing Market Index declined from 55 to 49 in August, which is the first time it has dropped beneath 50 since May 2020.
Current sales dropped 7 points to 75, while sales over the next six months dropped from 49 to 47. Buyer traffic dipped from 37 to 32 - Builders are definitely anticipating further slow down.
This week brings several other important housing reports, including Housing Starts and Permit and Existing Home Sales.
Additionally, the Fed Minutes from the July 27 Fed Meeting will be released.
Mortgage Bonds continue to trade in a narrowing pennant formation and are being squeezed in a narrow range between support at the 25-day Moving Average and overhead resistance at the 100-day Moving Average.
Often times, Bonds will break out of these types of patterns in the direction of the previous trend, which was higher. The 10-year is in a similar position but reversed since we are looking at the yield. The 10-year is also battling with an important technical level at 2.79%.
Begin the week carefully floating.
Source: MBS Highway
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