August 31st, 2022 - Market Update
Current position: Locking Bias
Stocks are higher and Mortgage Bonds are slightly lower to start the day.
Cleveland Fed President, Loretta Mester, was interviewed and used the word pain 9 times in her talk, taking the cue from Jerome Powell. She anticipates the FFR to be above 4% by sometime next ear and to hold it there for some time. With the Fed Funds Rate currently at 2.50% and a potential 50bp or 75bp hike on Sept 21, it means the FFR will likely be around 3%. According to her expectations, it could mean more rate hikes in the cards to get to her target of 4%.
Do remember, she is known to flip flop - A year ago, she expected inflation to be between around 3.5% to 4% by end of 2021 and to come down in 2022. The Fed will also be in a tough spot if the jobs picture starts to deteriorate.
And on that note, ADP is back with their employment data after taking several months off from releasing reports to adjust their methodology to be more accurate. Instead of using modeling, they are now using actual payroll data from over 25 million employees. The report showed that there were 132,000 job creations in August, down from 270,000 in July and 380,000 in June. Clearly, the trend is a slowing jobs market.
This report is independent from the BLS data, which uses a lot of modeling and could be more accurate…but it may not be a good gauge to forecast the BLS Jobs Report data this Friday, which is expecting 300,000 job creations.
They also reported that annual pay for job stayers was up 7.6% year over year, while Job changers saw an average increase of 16.1%. When you remove the bottom quadrant it's much higher. BLS data showed all incomes went up 6.7% to 9% when removing the bottom quadrant, so a 33% increase.
We also received JOLTS yesterday, and many were making a big deal that job openings increased to 11M. However, our good friend Peter Boockvar pointed out that work from home may be giving false readings and counted multiple times…meaning that a job opening could be posted in several different states multiple times because they could be looking to fill the position from anywhere around the country, so openings may be significantly overstated.
The MBA released their Mortgage Application data for last week, showing that Purchases fell by 1.8% last week and are down 23% year over year. Interest rates moved higher from 5.65% to 5.80% and are 2 5/8% higher than this time last year.
Refinances decreased by 8% last week and are down 83% year over year. Refinances made up roughly 30% of all transactions, down from 31%. Mortgage Bonds continue to trade in a wide range between support at 99.28 and overhead resistance at 100.47, but they are now getting closer to support.
The trend is clearly lower, and Bonds are not reacting favorably to a weaker jobs report from ADP, potentially because of the increase in wages. The 10-year is trading at 3.14%, above the 3.10% ceiling and with room to move higher until reaching 3.25%. Things can change on Friday after the BLS Jobs Report, but we feel there is more risk for things to get worse. Continue to have a locking bias.
Source: MBS Highway
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