Learn from the Past
Overview
Mortgage backed securities (MBS) gained 43 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week and set a new record low for rates for 2017.
A perfect storm: That is what it took to drive MBS pricing higher (which means lower rates) last week. Uncertainty and fear drove demand for longer term bonds in the face of Harvey and the impending Irma, North Korea and our Debt Ceiling. In addition, the number 2 person at the Fed (Stanley Fischer) retired early (his term ends in June 2018 but he will step down October 2017).
On the Central Bank front, the Bank of Canada surprised the markets with a 1/4 point rate hike but the European Central Bank disappointed with no real guidance on the timing of winding down their massive bond purchasing program.
The Talking Fed
The Beige Book was released.
You can read the official release from the Fed here.
Little has changed in the 12 Federal Reserve Districts from the last report as all districts reported “moderate” to “modest” growth. In fact, the word “modest” was used 140 times and the word “moderate” was used 80 times in the report. It looks like several districts were concerned about a slowdown in the auto sector (you can dismiss this, folks…auto sales will spike as all of those water-logged cars from Harvey, Irma and Jose will need to be replaced…a huge boon to the auto market in the next 60 days).
Participants cited tight labor markets and non-wage (benefits) compensation as having less of an impact on attracting workers which could indicate that actual wages paid may soon be rising in order to hire away good workers.
Geo-Political
The House voted to “kick the can” down the road until December 8th, as they voted to “suspend” (so not raise but suspend) the debt ceiling. They also approved $115B for Harvey relief efforts.
European Central Bank (in) Action: The European Central Bank left their Interest Rate, Deposit Rate and Asset Purchase programs alone with no changes. ECB President Mario Draghi said, “ECB discussion on QE was very preliminary. Various scenarios were discussed as well as various pros and cons. The ECB discussed the QE covered length, size of plan.” He also said that they have not discussed increasing the types of assets that they can buy which is interesting as they have already gobbled up most of the inventory.
What’s on the agenda for this week?
Overview
The combination of much higher inflation in China (PPI at 6.5%), no missile from North Korea over the weekend and less damage than expected from Irma will drive MBS pricing back below that important level of 103.71 that was pegged as the “danger zone” last week. For the week, expect for MBS to return to the channel that they were in two weeks ago which still means great pricing but not at the levels from last week.
Three Things
The Three Things that have the greatest ability to impact back end pricing this week are: (1) Geo-political, (2) Across the Pond and (3) Domestic Flavor.
(1) Geo-Political: God bless America as we all reflect and remember September 11.
North Korea, did not lob another missile on Saturday. The markets were expecting one to go along with a key celebration over there. It could mean that they had technical difficulties or it could mean that the threat of tougher U.N. sanctions and an oil embargo has had an impact.
(2) Across the Pond: We will hear from the Bank of England on Thursday. While the markets do not expect a rate hike at this time, they will be paying close attention to the vote. The market expects a vote of 7-2 (two members wanting to raise rates). If that hits 6-3 or 5-4, then MBS will sell off. There will also be key inflationary data points from China and Germany.
(3) Domestic Flavor: It is a very light week for economic data but there are two very important reports. They are Wednesday’s CPI and Friday’s Retail Sales. The closer that the Core YOY CPI is to 2.0%, the worse it will be for rates. Retail Sales are expected to see a very small improvement.
It appears as if (recently downgraded) Tropical Storm Irma has been devastating but it was not as severe as projected. Still, half of Florida does not have power.
Treasury Auctions This Week
09/11 – 3-year note
09/12 – 10-year note
09/13 – 30-year bond (most important)
Market Wrap-up
Overview
MBS pulled back today after reaching unsustainable levels last week that were fueled by every possible type of marketplace fear. And the bottom line today is that some (not all) of that fear pulled back today and therefore, so did MBS.
Domestic Flavor
Treasury Auction: The 3-year note was about a B-. $24B went off at a high yield of 1.433% which is the lowest since February 2017. However, demand tailed off with a bid-to-cover ratio of only 2.70 which is the worst level since 2008.
On Deck for Tomorrow: FNMA Coupon Rollover, JOLTS and our 10-year Treasury note auction.
Across the Pond
China (number 2 economy): Inflation was much higher than expected as their YOY PPI came in at 6.5% vs estimates of only 5.6% which is a huge beat. CPI YOY was closer to the mark with a 1.8% vs 1.6% reading.