Market Update – March 24, 2023

Stocks and Mortgage Bonds are both lower to start the day, after Mortgage Bonds were nicely higher in the early going.
Fed Balance Sheet
The Fed just released their latest balance sheet figures, showing that they Fed balance sheet has risen by almost $400 Billion in the last two weeks.
Why are banks borrowing if everything is so sound as Powell and Yellen have stated? Could it be for safety, or do they really need it?
We have to remember, the Fed is the lender of last resort – Even at their new bank term lending facility, where banks can trade in their 2% long term bonds and get face value, they have to still pay about 4 3/8 on that money. So they are getting a 2% return, but have to pay 4 3/8%. This would be like taking out a home equity line of credit and then putting it in your bank at 2%...it would not make sense…unless you REALLY need it. This shows that the banking sector is weak and liquidity is a problem.
Deutsche Bank
The latest European bank under pressure is Deutsche Bank. This comes after a precedence was set in the UBS takeover of Credit Suisse. Normally, Bond holders would get precedence over equity holders in the case of a bankruptcy or liquidation. But in the UBS deal, equity holders received roughly 20 cents on the dollar, but CoCo Bond Holders (contingent convertible Bond holders) received nothing. This set off some unintended consequences, where now holders of these Bonds at Deutsche Bank are feeling much less confident they will get paid in this type of scenario, causing a sharp selloff. It's also causing insurance on these Bonds to go sky high, and weighing on the stock price of Deutsche Bank. This all comes at a time where banks want to sure up their balance sheet and capitalization...And this is of course not helping.
Durable Goods Orders
Durable Goods orders in February were down 1%, which was worse than the 0.6% gain expected. And this comes after a negative revision to the previous month, making this number look better than it would have been without the downward revision.
These are bigger non frequent purchases you have often have to finance – big ticket items - And they are more expensive to finance since the Fed has hiked to 5%. The Fed wanted to destroy demand, and they are doing so with success.
Next Week
Tuesday: Case Shiller HPI (appreciation data), FHFA HPI (appreciation data)
Wednesday: Mortgage Apps, Pending Home Sales
Thursday: Q2 Final GDP Reading, Initial Jobless Claims
Friday: PCE (Personal Consumption Expenditures)
Technical Analysis
Mortgage Bonds are battling with their 200-day Moving Average after opening above it this morning. This will be a critical level to watch - A clear break above this level means the next stop is at 101.67. The 10-year has moved down to 3.37%, but did get as low as 3.29%. Begin the day carefully floating.