MBS Highway Daily Updates 12/22/2022

Current position: Carefully Floating

Changes at the Fed

Come next month, there will be a rotation of the regional voting Fed presidents. Collins, Bullard, George, and Mester will be leaving. Except for Collins, who is neutral, they are all hawks.Coming in to vote will be Evans, Harker, Logan, and Kashkari. Logan is neutral, while Evans and Kashkari are doves, with Harker being a hawk. The net result is that we are getting 2 more dovish voting members, which may limit the Fed's ability to hike much more. Doves are typically less aggressive with rate hikes.

Initial Jobless Claims

Initial Jobless Claims, which measure individuals filing for unemployment benefits for the first time, rose 2,000 to 216,000 after last week's report was revised slightly higher to 214,000. Continuing Claims, or those that continue to receive benefits after their initial claim, fell 6,000 to 1.672 million, but the previous report was revised higher by 7,000. Continuing Claims have risen by more than 325,000 over the last few months and are at their highest level in 10 months. This is another sign that once individuals are laid off, they are having a hard time finding work as companies are not hiring.

Q3 GDP Final

The final reading of Q3 GDP showed that the US economy grew by 3.2% if you were to annualize the growth during the quarter. This was better than the 2.9% expected and follows two consecutive negative GDP readings in Q1 and Q2. There is an inflation component within GDP, but it's old data looking quarter over quarter. This remained unchanged but was expected to decline slightly, and is adding a little pressure to the Bond market. We still think tomorrow's monthly PCE reading is favorable for bonds; more on that below.

Tomorrow's PCE (Personal Consumption Expenditures) Inflation Report

The Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), will be released tomorrow morning at 8:30 a.m. ET. The previous report, which was for October, showed headline inflation of 6% and Core inflation of 5%.

The market is expecting headline inflation to decline to 5.5% and core inflation to drop to 4.7%. As previously mentioned, we anticipate the PCE report to come in cooler, just as the CPI (Consumer Price Index) report did. We may even see a larger drop than the CPI because of shelter costs. Shelter makes up 39% of the core CPI and was one of the only components that was still adding to inflation. But in PCE, it makes up a much smaller piece of the pie, almost half that of CPI, and means we could see a greater decline in inflation. Because of this, we could see the core go as low as 4.6%.

Technical Analysis

Mortgage Bonds are being squeezed in a narrow range between a dual floor of support at the 100 - day Moving Average and 100.758 Fibonacci level and overhead resistance at the 25 - day Moving Average. The 10 - year is in a wide range and testing support at 3.644, which is a Fibonacci level. The market catalyst will be tomorrow's PCE report, which we think will likely be Bond friendly and can help Bonds break above resistance and yields break under support. Begin the day carefully floating.