Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down as tensions continue in the Persian Gulf, driving oil prices higher.
Iranian-allied Houthi rebels in Yemen are threatening to prevent Saudi Arabia from exporting oil through the Red Sea. Saudi Arabia has diverted production to the Red Sea in response to Iran’s activity in the Strait of Hormuz. We’ll see if they are able to prevent the transit of millions of barrels of oil per day through the Red Sea. I suppose if they do manage to block the southern Strait, Saudi Arabia can just sent the oil through the Suez Canal.
The Index of Leading Economic Indicators declined in June, according to the Conference Board. Financial indicators (yield spread, stock market returns) drove the index higher, while consumer expectations were a drag. Declining building permits also contributed to the decrease.
“In June, the Leading Economic Index (LEI) for the US declined and partially reversed gains registered in May and April,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “While some components of the LEI were little changed, the largest positive contribution from the yield spread, followed by marginal positive input from the remaining financial components, were not enough to offset weak consumer expectations and a drop in building permits across most of its categories. Despite the recent decline, the LEI’s six- and twelve-month growth rates, while negative, were stable. Consumer spending is weakening, but strong business investment related to AI is expected to support economic activity while inflation continues to improve. The Conference Board raised its forecast from 1.8% to 1.9% y/y GDP growth for 2026.”
Mortgage REIT AGNC reported better-than-expected earnings as MBS spreads narrowed. During the quarter, MBS spreads to Treasuries narrowed by 17 basis points. US Treasury yields rose during the quarter, but mortgage rates more or less stayed the same.
AGNC’s earnings demonstrate that tightening MBS spreads have been a support for the mortgage market despite higher Treasury rates. What is driving the narrowing? Declining bond market volatility. After spiking early in the quarter due to the situation in Iran, bond market volatility (measured by the ICE / BAML MOVE Index) has fallen back to pre-war levels.
