Inflation Overpowered by J&J News

Good morning everyone!

We have a wild news day starting with the hot inflation reading that came in this morning. Now remember, this rapid increase in year over year inflation is something that we have been warning about for months. Last year at this time, we had negative inflation while the country was in lockdown. So, when we look at year over year numbers, they are going to appear to be huge and can potentially spook bond investors. The Consumer Price Index came in at 2.6% – a 53% increase from the prior month. This caused around a 36 bps drop in MBS pricing this morning. However, the other big piece of news is the pause of the Johnson & Johnson vaccine rollout. The FDA paused the rollout after 6 women were diagnosed with the same blood clotting issue. If you remember the St. Lewis Fed President Bullard talked about the Fed reducing spending on Mortgage Backed Securities after 75% of the US was vaccinated and the economy was able to fully open up. It seems like the bond market believes that this J&J hiccup will cause a large delay in the vaccine rollout and reduce the number of people willing to get it as MBS are now up 22 bps – over a 60 bps swing from this mornings inflation news.

Earlier this month, we talked about the crazy percent of homes that were selling over asking price across the United States – 42%. Today, Google released that the question “When is the housing market going to crash?” spiked 2,450% in the last month. While this does not hold any technical weight, it does hint at declining consumer sentiment even though the housing market continues to climb and inventory remains at all time lows. While there are many signals pointing toward continued strength in the housing market, there are a lot pointing in the opposite direction. The biggest being the massive number of people still in mortgage forbearance and still receiving Pandemic Assistance across the country. The concern is that when forbearances and assistance end and everyone has to make their mortgage payment with a reduction in monthly income, we could see the housing market turn quickly. Hopefully, the massive number of people looking for a home will still be in the market to prevent any crash.

While it looks like we got a break from this mornings inflation news, there will not be a counter balance to the next 3 or 4 inflation readings. We can expect MBS pricing to continue to deteriorate as these massive year over year inflation readings come in. We recommend a locking unless you are able to closely watch this volatile market.

Have a great day everyone!

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