Last week markets were rocked when Mr. Powell came down hard against the view the Fed was about done increasing rates. Powell made it clear that the Fed would not let up until inflation is back toward 2.0%, even at the risk if economic slowing. Monday morning, BlackRock, the world’s largest asset manager, is saying markets are too relaxed about inflation slowing. BlackRock agrees inflation is slowing faster than it expected but is recommending being underweight on government bonds in favor of inflation-linked debt and investment-grade credit next year.

Rates Currently Trending: Neutral

Mortgage rates are moving sideways today. The MBS market worsened by -34 bps yesterday. This was enough to increase mortgage rates or fees. The market experienced high volatility yesterday. Reprice risk on the day is moderate, low trading volumes will continue to leave the door open for volatility. The outlook remains the same though, despite rates likely to creep up a bit this week we aren’t in any danger yet of big rate jumps yet.

Today’s Rate Forecast: Neutral

Housing: November Housing Starts were higher than expected, 1.427M vs. est. of 1.415M on an annualized basis. Single-Family starts were down -4.1% from 863K to 828K SAAR, which is the lowest since May 2020. Multi-Family starts rose 4.8% from 557K to 584K, highest since April 2022. Building Permits fell short, 1.342M vs. est. of 1.470M and a steep decline from October’s pace of 1.513M and is the biggest MOM drop since the Covid lockdowns.

Central Banks: The People’s Bank of China kept their key interest rate at 3.65%. The Bank of Japan also kept their interest rate unchanged at -0.1% but decided to modify its so-called Yield Curve Control framework and increase the quantity of government bonds it will buy each month.

Today’s Potential Rate Volatility: High

This morning markets have been trending towards higher rates. Volatility has started high with markets roiling on the Bank of Japan news. The Bank of Japan caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese government bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously. The consensus is that the Bank of Japan’s actions signal that inflation might be an issue even there, even though Japan has been struggling with deflation for over 2 decades. It was a surprise to everyone outside of Japan, so it hit hard this morning.

TECHNICALS:

The UMBS 5.5 coupon (MBS or mortgage backed securities) at 100.81, -34bps and slipping hard again.

The 10yr Treasury yield at 3.70, and this is a BIG move after ending last week at 3.49. We now don’t see solid technical support till 3.83.