September 19, 2019

MBS Highway, market wrap – 9/18/2019

The Fed Meeting is behind us – Stocks have ended the day higher. The Dow closed +36.28 at 27,147,08
and the S&P 500 closed +1.03 at 3,006,73. Mortgage Bonds ended the day higher, but off their best

So what happened with the Fed? The Fed cut rates by 0.25%, as expected. There were 3 dissenters –
Rosengren and George both wanted no cut, while Bullard wanted a 50bp cut. Interestingly, the Fed did not
mention the recent spikes in inflation we have seen in the CPI report or Jobs Report. Instead, the Fed said
inflation is running below their 2% target…They are married to looking only at the core PCE report, which
we think is a bad indicator of real inflation. Nonetheless, Bonds did not have a great reaction to this, as we
might have expected.
On what to expect going forward – There are 17 Fed members (only 10 voters). The Fed Dots chart shows
where all the Fed members think the Fed Funds rate will be in the future. And only 7/17 members see
another hike this year. That’s not to say that there won’t be another one. Jerome Powell was pretty clear
that the Fed is data dependent and that the Fed will do more if there is a big downturn in the economy. But
for now, this could potentially be the last cut of the year.

Economic Data
More strong housing news on the new construction front – Following the best builder confidence reading
of the year yesterday, Housing Starts were reported up 12.3% in August…And July was revised higher.
Factoring in the revisions, Starts are really up 14.5%. This is a 12-year high for Housing Starts! Tempering
a bit of the optimism is the breakdown of multi-family starts vs single-family starts. A large portion of the
gain was in multi-family, but single-family was still up a nice 4.4% to the best level since January.
Permits, which are a good forward-looking indicator, also showed strength, jumping 7.7% in August. There
were some minor negative revisions to July, but even with the revisions, Permits were still up 6.2%. Singlefamily permits were up 4.5%, which is also strong. Overall, this a very solid Housing Starts report, echoing
the strength seen in yesterday’s NAHB Housing Market Index.

Upcoming Events
Tomorrow we will get Initial Jobless Claims and Existing Home Sales. We expect the latter to be very
strong, as it is measuring activity in the existing home market for the month of August, when interest rates
made their biggest move lower.

Technical Picture
Mortgage Bonds continue to trade in the middle of the range between support at the 100-day Moving
average and overhead resistance at the 50-day Moving Average, but did test the aforementioned ceiling,
before being pushed lower. We have to be careful, as yields are susceptible to price swings when in such
wide ranges and there could be a re-price before reaching support.
The 10-year ended the day at 1.80%, just above the dual floor of support at the 50-day Moving Average
and the 1.779% Fibonacci level.


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