Friday, August 28, 2020

Daily Market Report 8/28/20 Inflation rose a little bit in the month of July, as the Personal Consumption Expenditure rose 0.3% MoM; and increased it's YoY from 0.9% to 1.0%.  When you remove the Food and Energy, then you have the Core PCE (the Fed's favorite measure for inflation), which also rose 0.3% in July; and it's YoY rose from 1.1% to 1.3%.  The Consumer Spending rose 1.9% in July, as it's counter-part, Personal Income, rose 0.4%.  The Chicago PMI, which measures the manufacturing in the Chicago region, had a slight dip in August, as it went from 51.9 in July to 51.2 in August.  Anything above 50 is considered expansion.  Consumer Sentiment rose slightly in August, as it went from 72.8 in July to 74.1 in August.  Stocks are Up this morning, especially considered the Fed's move yesterday, as they announced they will make a policy change from having a 2% target rate for inflation to averaging 2%.  They will look more closely on employment and allow inflation to run a bit (moderately) hotter than in the past.  Investors love this, as it will help Equities.  The Fed will most likely leave the Fed Funds Rate down for some time.  However, don't be confused this will help Mortgage Rates, as this typically has an ADVERSE effect on Mortgage Rates.  To put it mildly, Inflation is the arch-enemy to MBS/Bonds, and that effect, Mortgage Rates, as it erodes the value of these investment vehicles because they are fixed over a long period of time.  Currently, the Fed has been purchasing MBS, which has been propping up Mortgage Rates, but for how long?  Currently, MBS is Up 14bps, but Mortgage Rates are slightly better than yesterday's close.  MBS dropped 25bps and led many lenders to re-price for the worse 2x yesterday; so, we're priced somewhere in the middle today.  Yields are continuing it's pressure on MBS, as it's still above the important ceiling, which has become a new floor of support; and sits just above 0.73%,

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