February 23rd, 2021 9:07 AM by Richard Sardella MLO.100007700/NMLS 233568
The day started with interest markets unchanged from yesterday’s selling. By 9:30 am ET, MBS prices were under another round of heavy selling while the 10 yr. rate is up 1 bp from yesterday to 1.37%.
Today the main event is Jerome Powell’s testimony to the Senate Banking Committee (10:00 am ET) about the economy and what the Fed is thinking. Powell and other Fed officials stance about wanting inflation to increase at or above 2.0%, and when (if) it does the Fed has said over and over it would not be concerned and would not alter the Fed’s present low rates and continuing buying MBSs and treasuries to support low rates and bolster the economy. Now though, markets’ tune about no inflation fears has swung 180 degrees recently once the 10 yr. note exceeded 1.0% and has kept increasing at a pace not expected. What is the Fed’s response? What does Powell believe the Fed should do (if anything)? What does he believe about massive continuing monetary spending plans? Will he support Janet Yellen’s view that increased monetary spending is needed that the increasing debt is worth the cost?
Financial markets are in turmoil with the recent increase in interest rates, mostly because the equity markets are in extreme overbought conditions and interest rates have been flat to lower for years, and it became entrenched in rate thinking psychology that low rates would always be there. Rates will stay low, although likely not at the lows we saw last August or since then. The 10 yr. note yield has been increasing since last August when the yield briefly fell to 0.57%. Until the last few weeks, though, it wasn’t an issue with investors as it currently is. Workers and businesses need to see inflation stay high for a while before they start expecting higher wages and charging higher prices, setting off a self-reinforcing upward spiral. The Fed can quickly curtail inflation by raising short-term rates, adjusting the interest rate it pays on bank reserves, and slow its monthly purchases of treasuries and MBSs. We doubt Powell and the Fed are worried. What we are experiencing in markets now is the realization interest rates have likely seen their lowest levels.
More inflationary news in the housing sector from Dec Case/Shiller and Dec FHFA home price indexes. Case/Shiller 20 city price index expected +1.0% increased to 1.3%, yr./yr. unadjusted expected +9.6% increased 10.1%. The Dec FHFA home price index was thought to be +0.8%, as released it increased 1.1% and yr./yr. +11.4% from 11.0% in Nov. These are dated data but expect to see home prices increasing in Jan and continuing to hold higher levels for the next few months.
Prices are increasing at the producer level as the economic rebound has been much more robust than anyone was believing. Still not seeing it at the consumer level, but it is coming. Manufacturers are being squeezed with higher prices and slow deliveries as consumer spending in the pandemic has been substantially stronger for durable goods. Many consumers are flush with savings courtesy of stimulus payments and about to get another round when the Biden $1.9 trillion package is passed next week. But that isn’t the end; Democrats are currently working on another bill that will fund infrastructure spending that will dwarf the current stimulus amount.
At 9:30 am ET, the DJIA opened -85, NASDAQ -253, S&P -26. The NASDAQ in a major correction, down 341 yesterday. 10 yr. at 9:30 am unchanged at 1.37%. FNMA 2.5 30 yr. coupon at 9:30 -16 bps from yesterday’s close and -39 bps from 9:30 am yesterday; FNMA 2.0 30 yr. -23 bps from yesterday’s close and -37 bps from 9:30 am yesterday.
At 10:00 am ET, Feb consumer confidence index from the Conference Board, expected at 90.0 from Jan revision from 89.3 to 88.9, increased to 91.3.
At 1:00 pm ET, Treasury will auction $60B of 2 yr. notes.
The 10 yr. note is oversold, and we expect improvement or at least no increase until the market consolidates the recent spike, the same in the MBS markets. Too much selling in too short of time.
PRICES @ 10:00 AM ET
10 yr. note: 1.38% +2 bp
5 yr. note: 0.58% -1 bp
2 Yr. note: 0.11% unch
30 yr. bond: 2.20% +2 bp
Libor Rates: 1 mo. 0.114%; 3 mo. 0.175%; 6 mo. 0.204%; 1 yr. 0.285% (2/22/21)
30 yr. FNMA 2.0: @9:30 101.08 -17 bp (-37 bp from 9:30 yesterday)
30 yr. FNMA 2.5: @9:30 103.75 -16 bp (-39 bp from 9:30 yesterday)
30 yr. GNMA 2.5: @9:30 103.50 -25 bp (-53 bp from 9:30 yesterday)
Dollar/Yuan: $6.4700 +$0.0052
Dollar/Yen: 105.29 +0.21 yen
Dollar/Euro: $1.2141 -$0.0018
Dollar Index: 90.22 +0.21
Gold: $1799.10 -$9.30
Bitcoin: $46,442 -$8477
Crude Oil: $60.99 -$0.71
DJIA: 31,274 -247
NASDAQ: 13,190 -343
S&P 500: 3834 -42
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
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MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.