September 14th, 2022 - Market Update
Current position: Floating.
With the continued deterioration in MBS, we have changed our focus to the 5% coupon.
Bonds went through their monthly coupon rollover last night. This occurs each month because Mortgage Bonds are finite. They have an end term, such as 30 years. Therefore, each month a new 30-year period begins. This new 30-day extension is reflected in an adjusted rollover price. This rollover does not impact your pricing. The effect of yesterday's rollover was -16bp.
Stocks and Mortgage Bonds are both sharply lower after hotter than expected inflation data.
The August Consumer Price Index (CPI) report showed that overall inflation increased by 0.1%, and although that is a low figure, it was larger than the -0.1% expected. Year over year, inflation declined from 8.5% to 8.3%, but was expected to drop to 8.1%.
The real story here is the Core rate, which strips out food and energy prices. It increased by 0.6%, which was double the expected 0.3% increase. As a result, year over year core inflation remained increased from 5.9% to 6.3%, which was hotter than the 6.1% expected.
Shelter rose by 0.7%, which is the highest increase since 1991 - Rents rose 0.7% last month and are now up 6.7% year over year, which is up from 6.3%.
Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, also rose 0.7% and is up 6.3% ear over year, up from 5.8%.
Looking at more of the internals - Energy prices fell 5% from a month ago, bringing the annual gain to 24%. Gasoline prices fell 11% and are up 26% year over year.
Food prices, which make up 14% of the CPI, climbed 0.8% in August, bringing the year-over-year gain to 11.4%. Explosion in credit cards - A sign of inflation impacting consumer is credit card debt up 15% year over year, which is a record high. Credit card debt is growing at $33B per ear. which is double the pace of a normal year. It clearly shows people are relying on their credit cards to deal with the higher costs of inflation.
Railway unions and corporations are in negotiations to avoid a strike. The deadline is midnight on Friday, but if there is not a resolution, this would affect over 60.000 workers and add to the already big inflation problem, as it would strain supply chains further.
As a result of the higher inflation, the Fed futures, which tries to predict what the Fed will do, is now pricing is an 80% chance of a 75bp hike and a 20% chance 100bp hike at the September 21 meeting. It's almost a lock that the Fed is going to hike 75bp.
Yesterday’s 10-year Auction was met with weak demand - MBS Highway’s Bill Hagmann graded the auction a "D". Later this afternoon at 1:00pm ET there will be a 30-year Bond Auction, which may be a rocky result with what's going on with inflation.
Mortgage Bonds are in a clear downward channel, testing support at the lower bound of this channel, as well as the 99.781 Fibonacci level. If this level is broken, there is a lot of room to the downside. Clearly, inflation did not come out as low as we and the markets were expecting - After locking almost all of last week, we wanted to give inflation and Bonds a chance, but hopefully the majority of your pipeline was protected.
With the damage done this morning, and with Bonds at an important floor, we can begin the day floating.
Source: MBS Highway
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