MBS MORNING: Recap and Reaction to Bernanke Testimony
Ben Bernanke has shared the text of his prepared testimony and is now answering brilliantly thought-out questions from the congressional panel. Before I poke fun at the congresswomen who asked Ben about his decision to raise the FED FUNDS RATE last week (wrong), here is a recap of Ben's prepared words of wisdom.
He opened with the usual recap of events that led us to the brink of failure and called attention to a "nascent" economic recovery. Nascent means hopeful, budding, promising, emerging, blossoming. While progress has been seen since we hit bottom in early 2009, Ben was sure to remind that much of the improvement was a factor of shrinking business inventories. We discussed this in detail HERE. After that he went on to say that further recovery progress was reliant on consumer demand (consumers and businesses). So job creation is a key part in the restoration of normalcy.
This is what he said about jobs:
"Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce. Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago."
Plain and Simple: if you do not have a job, go back to school and re-educate yourself in whatever trade you consider yourself to be an expert in. If you are having a tough time determining your level of expertise, may I recommend the technology sector (energy) as a good starting place. This of course assumes you have the resources to learn. While the internet is a great source of education, many out of work folks can't afford to go back to school. Our highways and bridges will need repair...the government needs more people to do this. The government is hiring!
In regards to inflation, the weak dollar and rising energy prices are to blame for the most part. We might get lucky here in that the US will likely come out of this economic contraction before most other developed countries...thus the dollar would improve and energy prices would benefit. Reducing the budget deficit would help the dollar but that isn't happening anytime soon. I know main streeters do not like to strip out food and energy because they are necessities, but it is important to point out that core CPI will be weak for some time thanks to weakness in the labor market (resource slack). Ben also called attention to the cost of shelter, saying it was coming along very slowly due to high vacancy rates. Shelter makes up a big portion of the CPI, so housing professionals should have a decent "hands on" gauge of inflation.
Ben does recognize that bank lending continues to contract. Citing tight credit standards....not much you can do there Ben. We need qualified borrowers to lend to...otherwise it might be deemed "irresponsible", although I will say there are certain aspects of mortgage underwriting regs that could benefit from a little belt loosening.
On the MBS Purchase Program: NOTHING NEW
"We have been gradually slowing the pace of these purchases in order to promote a smooth transition in markets and anticipate that these transactions will be completed by the end of March. The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets."
Ben again outlined how the Fed has already started exiting the financial markets via the winding down of special liqudity facilities. Only the MBS program and Term-Asset Backed Facility remain (auto loans, credit cards, student loans, commercial). After March 31 only the CMBS window will remain open. SLOW AND STEADY WITHDRAWAL
re: the Discount Rate
"To discourage banks from relying on the discount window rather than private funding markets for short-term credit, last week we also increased the discount rate by 25 basis points.....These adjustments are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC."
Plain and Simple: no big deal. This prevents more new money from entering the money market where there is already a massive amount of liquidity.
Ben did once again inform us that the Fed Funds rate is expected to remain exceptionally low for an extended period. The 2 yr note was a big fan of this...check out how yields in the short end of the curve moved lower. 2s/10s still at 281bps by the way.
Ben provided the same insight we got two weeks ago about the Fed's exit strategy: READ ABOUT IT HERE
He discussed making sure the public understood everything the Fed was doing and how it was expected to effect our wallets. Then Ben went into regulatory reform, here are the mortgage related comments:
"The Federal Reserve has proposed a comprehensive overhaul of the regulations governing consumer mortgage transactions, and we are collaborating with the Department of Housing and Urban Development to assess how we might further increase transparency in the mortgage process"
Another round of GFE reform might help with that Ben..."keep it simple stupid" totally back fired in the most recent attempt.
PLAIN AND SIMPLE: We've heard all this already, not much new content to discuss. The market's main focus is on monetary policy. The Fed is going to keep the Fed Funds Rate for a long time, it will be one of the last moves employed after a long road of gradual withdrawal. Nothing new about the MBS purchase program.
I might be acting a bit biased here...but you would think the congressional panel might be better prepared for Bernanke. They are asking the same old questions they always ask, in some cases they are asking questions that make no sense or are confused. You want Ben talking, they need to shorten up their questions and get more direct with their intentions...act like a prosecuting attorney!
Overall...this hearing has been boring, he has yet to be challenged. In fact...New Home Sales data played more of a role in market movement than Ben's testimony. Did you see how surprisingly crappy new home sales were in January? Although excess contraction was likely a function of wintry weather in the Northeast... structural weakness remains.
Stocks have held up well all day....instead of trying to relate this strength to fundamental data, which would not make sense because New Home Sales were in the dumper, I am going to rely on technical studies. More Fibonnaci Retracements. Stocks bounced off of 1,095 support. The S&P is now +0.80% at 1,103.
10s broke 3.68% resistance right at 10am when the New Home Sales data printed. Since then we've been in a holding pattern. The 3.625% coupon bearing 10 year TSY note is now +0-04 at 99-19 yielding 3.676%.
"Rate sheet influential" MBS prices spiked higher at 10AM..but that didn't last long as higher benchmark TSY prices outpace MBS. It is normal for "rate sheet influential" MBS coupons to lag into knee jerk TSY rallies. The real story is how badly the "UP IN COUPON" trade is doing today. Higher MBS coupons are getting slaughtered today. The FN 4.0 is +0-01 at 97-29 yielding 4.201% and the FN 4.5 is +0-00 at 100-26 yielding 4.412%. The secondary market current coupon is now 4.37%. The CC yield is 60.9 basis points over the 10 yr TSY note yield and 60.9 basis points over the 10 yr swap rate.
NEXT EVENT: $42 billion 5s at 1pm.
If youre floating through this, looking to sell at the rate sheet rebate highs, a stable move above 101-00 would bring on reprices for the better. Reprices for the worse around 100-16. If 10s hold steady at 3.67%, there is room for FN 4.5 prices to tick higher.