Morning Update 2-1-2023

[Larry Bailey]

Stocks are lower and Mortgage Bonds are higher to start the day. The Fed kicks off their two-day meeting today, with their statement due for release at 2:00pm ET. Fed Chair Jerome Powell will follow up the statement with a press conference, where he will take questions.

The Fed is a lock to hike 25bp, but their commentary on inflation, recession, job growth, Quantitative Tightening, and how many hikes are left will all be in focus.

After today, the next meeting is March 22, where it’s expected for now that the Fed will hike another 25bp. Remember, there is almost always a big knee-jerk reaction after the statement & press conference before seeing the true intention of the market.

ADP Employment Report

ADP released their employment report, showing that there were only 106,000 job creations in the month of January, which was much weaker than the 175,000 expected. Looking at the sectors, Leisure and Hospitality led the gains once again.

ADP also reported that annual pay for job stayers increased 7.3% year over year, unchanged from the previous report. Job changers saw an average increase of 15.4%, up from 15.2%.

ADP said, “In January, we saw the impact of weather-related disruptions on employment during our reference week.” While ADP is blaming the number on poor weather in some parts of the country during the week of the 12th, when they collect data, we are reading this as a weak figure. It is winter, and there are supposed to be seasonal adjustments for this type of thing.

Additionally, it’s been very mild in most of the country.

Mortgage Applications

The MBA released their Mortgage Application data for last week, showing that purchases fell 10% last week after rising 28% over the previous two weeks and are now down 41% year over year.

Interest rates decreased ever so slightly to 6.19% from 6.2%. Last year at this time, rates were roughly 3.75%, which means rates are around 2.5% higher today. Refinances fell 7% last week after rising 49% in the previous two weeks…albeit from very low levels. Refinances are now down 80% from this time last year.

The MBA said, “Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth. Both trends will help some buyers regain purchasing power.”

Technical Analysis

Mortgage Bonds continue to trade in their well defined range, almost testing the upper limit at the 101.671 Fibonacci level. If we get a Bond-friendly Fed meeting, the next stop is the 200-day Moving Average. If things don’t go well, there is a strong dual floor of support that has limited the downside in Bonds, formed by the 25 and 50-day Moving Averages. Begin the day carefully floating ahead of the Fed.