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Morning Report: Two big bond mavens shift their view on the bond market


Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are flat

US growth edged higher in September, according to the S&P Flash PMI. “Hope of a soft landing for the US economy will be encouraged by the improved situation seen in October. The S&P Global PMI survey has been among the most downbeat economic indicators in recent months, so the upturn in US output growth signaled at the start of the fourth quarter is good news. Future output expectations have also turned up despite rising geopolitical concerns and domestic political tensions, climbing to the joint highest for nearly one-and-a-half years. Sentiment has improved in part due to hopes of interest rates having peaked, something which looks increasingly likely given the further cooling of inflationary pressures witnessed in October. In spite of higher oil prices, firms’
input cost inflation fell sharply to the lowest since October 2020, and average selling prices for goods and services posted the smallest monthly rise since June 2020. The survey’s selling price gauge is now close to its pre-pandemic long-run average and consistent with headline inflation dropping close to the Fed’s 2% target in the coming months, something which looks likely to be achieved without output falling into contraction. That said, the tensions in the Middle East pose downside risks to growth and upside risks to inflation, adding fresh
uncertainty to the outlook.”

I find it interesting that the Atlanta Fed GDP Now model sees 5.4% GDP growth in Q3. Look at the chart below, where the grey bars are GDP growth. 5.4% GDP growth is an exceedingly rare growth rate. The other thing that sticks out is that the PMI and GDP correlation broke down in late 2021.

Is a change in sentiment happening in the bond market? Investing giant Bill Ackman announced he covered his bond short (in other words no longer betting on higher rates) yesterday : “There is too much risk in the world to remain short bonds at current long-term rates” . Bond King Bill Gross also tweeted that he is long bonds at these levels and forecasting a recession in Q4. “Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in 4th quarter…On bonds. Invest in the curve. Various combinations 2/10, 2/5. Should go positive before year end. I’m buying SFR h5 (SOFR futures). Higher for longer” is yesterday’s mantra. 2/2″

Fed tightenings usually last until the Fed breaks something. Commercial mortgage backed security spreads are widening big time. Investors are pricing in a wave of commercial real estate defaults. Commercial real estate woes will have a bigger impact on smaller banks than the larger ones.

Home purchases are falling through at the fastest rate since last year at this time, according to Redfin. About 53,000 sales contracts fell through in September, or about 16%. Rising mortgage rates are a big driver, but there are other issues too. “Buyers are extra cautious right now. They want to make sure they’re getting a good deal given how much mortgage payments have gone up, and when they don’t feel like they’re getting a good deal, they’re backing out,” said Heather Kruayai, a Redfin Premier Agent in Jacksonville, FL, which saw the second highest rate of deal cancellations among the major metros Redfin analyzed. “Transactions are also falling apart due to skyrocketing insurance premiums and disagreements between buyers and sellers over necessary repairs. Overall, buyers hold a lot of the cards right now, and sellers are having to give out more concessions to close the deal.” 

How ridiculous have real estate prices become? You can own a meth lab for $1.5 million.

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