Learn from the Past
Mortgage backed securities (MBS) gained 43 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower for the week.
It was a holiday-shortened week with bond trading closed on Monday for Christmas and closed early on Friday for New Years. There was very strong economic data that would normally pressure MBS (causing higher mortgage rates) but instead we saw some demand for long bonds as traders “parked” their money in safe, low return bonds over the holiday week and end of year which drove up MBS prices which pushed mortgage rates temporarily lower.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims came in at 245K vs estimates of 240K and matched the prior week’s 245K. The more closely watched 4 week moving average is still below 240K at 237,500.
Manufacturing: The December Chicago PMI (aka the “business barometer”) was much higher than expected (67.6 vs estimates of 62.0) and is the highest reading in 6.5 years.
Trade Balance: The U.S. trade deficit (importing more than exporting) jumped to $-69.7B vs estimates of $-67.7B, although our Exports did increase by 3.0%.
Taking it to the House: Pending Home Sales in November (signed contracts not yet closed) were much stronger than expected (+0.2% vs estimates of -0.5) on a MOM basis. The October Case-Shiller Home Price Index showed a YOY gain of 6.4% in their 20 metro city index. The median price from the Existing Homes report is a much better data set and gets more attention than this reading but still, it is yet another housing report showing steady appreciation.
Consumer Confidence: The December reading was lighter than expected (122.1 vs estimates of 128.0); however, it is still near a 17 year high and a very good reading.
What’s on the Agenda for this Week?
Look for MBS to pull back in the -35 to -50 BPS range by the end of the week which would get them back close to the pricing levels of December 20th. There are no major events today and trading staff won’t be at full force until tomorrow. Big Jobs Friday will get a lot of attention with wage inflation being closely watched. Anything above 0.3% on a MOM or 2.5% on a YOY basis will pressure MBS. There were very significant readings in Chicago PMI and others in the past month, so expect some strength in ISM Manufacturing and Services which will also provide some headwinds for pricing. Overall, it would take something that is not a scheduled event for MBS to see any real gains this week. Barring a big geo-political surprise event, look for MBS to end lower for the week.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Domestic Flavor, (2) Across the Pond and (3) The Talking Fed.
(1) Domestic Flavor: Jobs will get most of the attention this week but really the ISM Manufacturing and ISM Services are just as important. Thursday and Friday are packed with job-related news including Challenger Job Cuts, ADP Private Payrolls and Initial Weekly Claims on Thursday and Non-Farm Payrolls, Average Hourly Wages, Average Work Week Hours, Unemployment Rate and Participation rate. The bond market will give the most weight to the YOY Average Hourly Wages data which is expected to hit 2.5%.
(2) Across the Pond: There will be big releases from the top world economies this week: China – Caixin Composit PMI; Japan – Nikkei Manufacturing PMI and Services PMI; Germany – Retail Sales, PPI and Markit PMI.
(3) The Talking Fed: Wednesday’s release of the Minutes from the December Fed meeting where they raised interest rates and dot-plot chart showing expectations of at least 3 rate hikes in 2018 will get a lot of attention. We will also hear from James Bullard (non-voting member), Patrick Harker (non-voting member) and Loretta Mester (voting member) this week.
Today was a big step towards the expected a -35 to -50 BPS pull-back by the end of the week. There were no domestic events today but there was strong manufacturing data from overseas.
Jobs, Jobs, Jobs: The Paychex Small Business Jobs Index showed that average national hourly earnings were $26.14 which is a YOY increase of 2.76% which is much higher than the expected 2.5% YOY gain in Friday’s Average Hourly Wages report.
On Deck for Tomorrow: Total Motor Vehicle Sales, Mortgage Applications, ISM Manufacturing, Construction Spending and the FOMC Minutes.
Across the Pond
China: Their Caixin Manufacturing PMI was stronger than expected (51.7 vs estimates of 50.6).
Eurozone: The aggregate Markit PMI was very strong and matched market forecasts of 60.6.