December 16th, 2022 - Market Update
Current position: Carefully floating
European Bond Market Selloff
The European bond market selloff is continuing today and their yields are moving higher and that is causing our yields to move higher in sympathy. Most central banks around the globe are hiking aggressively, as everyone has an inflation problem and they are trying to fight it with rate hikes. If the ECB is hiking rates, trying to fight inflation, why are their yields rising?
Remember that after we started hiking and up until a few months ago, rates were rising as the Fed hiked. This is because it was perceived by the market that the Fed had not gotten inflation corralled yet and were panicing to try to get it under control. But since November, the Fed has hiked 125bp and rates have moved lower. The other central banks around the globe are in the same position we were in months ago, where they are hiking, but it's not yet perceived that they have inflation under control. And once again, since there is global competition for yields, the rise in their yields are causing ours to move higher.
Next Week
Next week is full of important hosing data and the Fed's favorite measure of inflation, PC. We anticipate the PCE report to come in cooler, just as the CPI (Consumer Price Index) report did this past week. We may even see if move more significantly than CPI because of shelter costs. Shelter makes up 39% of core CPI, and was one of the only components that was still adding to inflation. But in PCE, it makes up about half of the weighting, and as such, we could see a greater decline in inflation.
Monday: NAHB Housing Market Index (Builder Confidence)
Tuesday: Housing Starts and Building Permits
Wednesday: Mortgage Applications, Existing Home Sales, 20-year Bond Auction
Thursday: Initial Jobless Claims, Q3 GDP (final reading)
Friday: Personal Consumption Expenditures (PCE), New Home Sales
Technical Analysis
Mortgage Bonds trading in the middle of a wide range between a triple floor of support, formed by the 25-day MA, 100-day MA, and 100.758 Fibonacci level...all of which are roughly 35bp beneath present levels. The 10-year is testing and important ceiling at the 100-day Moving Average and falling trend line that has been in tact since late October. We have to be careful here, because if this is broken, there is a lot of room to the upside in yield.
Source: MBS Highway
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