Learn from the Past
Overview
Mortgage backed securities (MBS) lost 17 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week. It was the fourth straight week of higher rates.
It was a very light week for economic data, with nothing on the calendar that could impact rates. It was the “Trade War” that got all of the market attention. MBS sold off (rates moved higher) on the prospect of higher consumer prices as a result of the latest rounds of tariffs announced by both the United States and China.
Trade War
The White House finally unleashed their new $200B in tariffs that they have been dangling for well over a month. However, it was not as bad as the headlines would suggest. Here are some key points:
– Goes into effect today
– Will only be at a 10% rate and then in 2019, goes up to 25%
– 300 products were exempted/stripped out of the tariff package
China’s Response: $60B in tariffs will go into effect on 09/24. It will impact 5,207 U.S. products and will be a measly range of 5% to 10%.
Taking it to the House
August Existing Home Sales were right in line with estimates, hitting 5.34M vs. estimates of 5.35M. July remained at 5.34M. Available inventory remained at 4.3 months of supply and the median sales price rose for the 78th straight month and is now $264,800.
Jobs, Jobs, Jobs
Initial Weekly Jobless Claims were lower than expected (201K vs. estimates of 210K). The more closely watched 4 week moving average dropped to 205,750 which is a fresh new 50 year low!
What’s on the Agenda for this Week?
Overview
Bottom line, the Fed needs to NOT raise their Fed Fund rate Wednesday AND show a lower probability of a December rate hike for there to be a reversal to the 4 week steady trend of higher rates and worse pricing. But it could be very likely that they do raise rates at this meeting AND the “dot plot chart” shows a greater probability of rate hikes in December and March. IF that is the case, then MBS will break below the current channel.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Inflation Nation and (3) Trade War.
(1) The Talking Fed: The FOMC will issue their Policy Statement and Rate Decision at 2:00 on Wednesday. The bond market is pricing in a 25 basis point rate increase. However, the real volatility will be driven not by a rate increase but by comments by Fed Chair Powell during his live press conference and by the release of their updated Economic Projections. Markets will focus on the “dot plot chart” which will show what the aggregate projections are among all of the Fed members (not just the voting members) as to where interest rates will be at the end of this year and the next two years. Traders take that and “reverse engineer” how many rate hikes there may be assuming a 1/4 point hike each time.
(2) Inflation Nation: Friday’s PCE report is the most important domestic economic release of the week. As the Fed’s “official” inflation rate, the Core (ex food and energy) YOY reading hit 2% last time around; it is expected to remain at 2%. If it ticks up, it will pressure MBS pricing.
(3) Trade War: The most recent round of $200B in tariffs on Chinese products and $60B on U.S. products go into effect today on both sides. This, by itself, is not going to move markets. But we will be focusing on any new announcements of additional tariffs, scheduled trade talks, movement in NAFTA, etc.
Treasury Auctions this Week
09/24 2 year note
09/25 5 year note
09/27 7 year note
Market Wrap-up
Overview
Just like Thursday and Friday of last week, MBS were “frozen” ahead of the Fed action this week. There were no major economic releases domestically or internationally. There was also no real new action on the Trade front. Oil continues to move higher and will provide some overhead pressure on all bonds which are “inflation sensitive.”
There were no significant economic releases today.
Treasury Auction
The “deluge of debt” kicked off this week with the shorter term 2 year Treasury note auction and it was not a good auction. $37B went off at a high yield of 2.829% which is the highest (worst) since 2007. Demand was dismal with the bid-to-cover ratio at 2.44 which is the lowest demand in nine years.
Trade War
The most recent round of $200B in tariffs on Chinese products and $60B on U.S. products go into effect today on both sides. This, by itself, is not going to move markets.
Texas Tea, Black Gold
Brent Crude closed at its highest level since 2014 after OPEC refuses to boost output.
What’s on Deck for Tomorrow
FOMC meeting begins (concludes Wednesday with rate decision), Case-Shiller Home Price Index, FHFA Home Price Index, Richmond Fed Manufacturing Index and 5 year Treasury note auction.