Morning Report: Bonds fall on strong consumer spending data

Vital Statistics:

Stocks are lower this morning as tensions in the Middle East continue. Bonds and MBS are down.

Retail Sales came in stronger-than-expected in September, rising 0.7% MOM and 3.8% YOY. If you strip out vehicles and gas, they rose 0.6% MOM and 4.0% YOY. Note these numbers are not adjusted for inflation, so they really are close to flat on a YOY basis. Regardless, the fact that it was stronger than expected is bond bearish, which is the psychology of that market. Whatever bid bonds got on the Gaza situation has evaporated.

Industrial Production rose 0.3% MOM while manufacturing production rose 0.4%. Capacity Utilization inched up to 79.7%.

The MBA’s Bob Broeksmit aimed both barrels at the regulatory state in his remarks at the MBA. He advocated for the Fed to stop hiking rates and stop QT in the MBS space until spreads stabilize. He also spoke out against the proposed Basel III capital requirement and the plan to designate independent mortgage banks as systemically important, thus subjecting them to banking-style regulatory oversight.

Bank of America reported better-than-expected earnings this morning. Mortgage origination volume fell 5% QOQ to $5.6 billion. This was down 36% on a YOY basis however. Unrealized losses on held-to-maturity mortgage backed securities was $107 billion, or 22.6%. Unrealized losses on Treasuries were $23.4 billion or 19.2%. Net Income was $7.8 billion so these mark-to-market losses are substantial. That said, MBS and Treasuries are “money good” so they will recoup those losses eventually.

Homebuilder confidence shrank again in September, according to the NAHB / Wells Fargo Housing Market Index. “Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”

“The housing affordability crisis can only be solved by adding additional attainable, affordable supply,” said NAHB Chief Economist Robert Dietz. “Boosting housing production would help reduce the shelter inflation component that was responsible for more than half of the overall Consumer Price Index increase in September and aid the Fed’s mission to bring inflation back down to 2%. However, uncertainty regarding monetary policy is contributing to affordability challenges in the market.”