September 15th, 2022 - Market Update
Current position: Carefully Floating.
Stocks and Mortgage Bonds are lower to start the day. The White House announced that a tentative railway strike deal is in place, which is great news for supply chains and inflation. If this resolution were not to be reached, more than 100k railway workers would have walked off the job and the estimated cost to the economy would have been $2B per day.
Our good friend, Peter Boockvar, broke down some preannouncements from several companies ahead of Q3 earnings.and many are saying that Q3 is shaping up to be a much tougher quarter. Additionally, Business Roundtable said that its Q3 2022 CEO Economic Outlook Survey dropped 12 pts from Q2 to 84, the lowest since Q2 2020.
Plans for hiring dropped 11 pts, those for capital investments declined by 11 pts, and expectations for sales fell by 12 pts. Clearly CEO's are expecting economic activity to slow next quarter and we will likely see more company layoffs and unemployment rise.
The Fed just released their planned MBS Purchases for the next 30 days, and it's zero. Remember, based on the Fed's holdings, they receive principal payments when people pay their mortgage, refinance, or sell their home. And the last three months, the Fed allowed $17.5B of MBS to fall off their balance sheet each month, but then bough MBS with any excess they received above that. Now in September, the Fed is reducing their balance sheet of MBS by $30B. And based on the amount they are receiving, they are not purchasing any additional as they do not have more than $3OB they are receiving.
It's important to note, however, that they are not selling any of their MBS holdings. How will this impact Mortgage Bonds? It's a bit of a balancing act, because while the Fed is no longer buying and allowing their balance sheet to run off, there is a lot less supply of MBS coming to market because volumes are down.
Retail Sales in August were up 0.3% on the headline, which was stronger than expectations of a 0.1% decline.but that does not tell the whole story. When removing auto sales, the figure is down 0.3%. The strength is auto sales is not likely due to higher volumes, but rather inflation and the fact that new car prices were up 10%.
When looking at Core Retail Sales, which removes automobiles, gasoline, building materials, and food services, it was flat and was much lower than the 0.5% gain expected. This is important because Core sales gets factored into GDP, and based on today's reading, should result in a negative revision to 03 estimates.
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, decreased by 5,000 last week to 213,000, which is the lowest level since May. Continuing Claims, which measures those who continue to receive benefits after their initial claims, decreased 2.000 to 1.4M. but that is after a 70k negative revision.
Mortgage Bonds are battling with the lower bound of the falling channel, which is an important technical level. If Bonds can get back above this level, there is room for improvement in the interim. If Bonds are rejected from this level, they will likely retest the lows from Tuesday at 99.375. Begin the day carefully floating.
Source: MBS Highway
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