Learn from the Past
Mortgage backed securities (MBS) gained just 9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week, which was very welcome after 4 straight weeks of rising rates.
It was a holiday-shortened week but that didn’t mean that there wasn’t any volatility. MBS had a swing of 42 basis points from the best pricing of the week (lowest rates) to the worst pricing of the week (highest rates).
Inflation Nation: The September Consumer Price Index was a little lighter than expected with the Headline CPI YOY coming in at 2.3% vs. estimates of 2.4% and Core PPI YOY at 2.2% vs. estimates of 2.3%. Import Prices MOM were more than double market expectations (0.5% vs. estimates of 0.2%) and YOY they rose by 3.5% vs. estimates of 3.2%. Atlanta Fed Business Inflation Expectations, the October survey showed a slight increase in expected inflation from 2.2% in September to 2.3% in October.
Wholesale Inventories: The Final August Reading was revised upward from the preliminary release of 0.8% to 1.0%. This will cause many to increase their 3rd quarter GDP guestimates.
Small Business Optimism: The September NFIB Index came in at a very robust 107.9 which is just off of August’s all-time high of 108.8 and is the third highest reading in history. 38% of business owners reported job openings they could not fill in the current period, while 61% reported hiring or trying to hire, with 87% of those reporting few or no qualified workers. A record net 37% of owners reported raising overall compensation, up 5 points from August and surpassing the previous record of net 35% set in May.
Economic Optimism: The Investor’s Business Daily TIPP report jumped to a reading of 57.8 in October vs. expectations of 54.6.
What’s on the Agenda for this Week?
Look for MBS to meet the 10 day moving average over the next trading session or two. Experts do not expect our domestic economic data to have an impact on pricing as it will not change the expectations for growth/inflation. With plenty of uncertainty over Trade, Brexit, Italy et al, there will be support consistent with last week levels. Look for MBS to remain within last week’s channel for more of a relative sideways movement in pricing.
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Across the Pond, (2) Trade War and (3) Domestic Flavor.
(1) Across the Pond: Brexit is front and center as the EU announced Sunday that it would reject Great Britain’s proposal and cancel their scheduled ruling/meeting for Monday but the EU/Brexit Summit will continue all week. There will be important readings out of the world’s largest economies:
- China: GDP, CPI, PPI, Retail Sales
- Japan: Industrial Production, Imports and Exports, CPI. EU: CPI
- Germany: Wholesale Prices
- Italy’s tiff with the EU over their budget will also continue to grab headlines
(2) Trade War: The White House is said to be considering another round of tariffs. China, which is biding its time for the U.S. midterm elections, is reevaluating that position as polling data suggests that Republicans may hold on to both houses.
(3) Domestic Flavor: The biggest economic data point of the week is Monday’s Retail Sales, but even this report which has historically carried a lot of weight is not likely to change pricing. The bond market will focus on Wednesday’s release of the minutes from the last FOMC meeting where the raised rates as the biggest event of the week.
Taking it to the House
There is a lot of housing data this week: the NAHB Housing Market Index, New Housing Starts and Building Permits, Weekly Mortgage Applications and Existing Home Sales. None of it will impact MBS pricing but it will give a good idea on how our industry is doing.
As expected, MBS have meandered all day within the intra-day trading channel. While there was a big economic release with Retail Sales, the markets basically glossed over it.
Retail Sales: The September Retail Sales report was a mixed bag. The headline MOM reading rose just 0.1% vs. estimates of 0.5%. When you strip out Autos, Retail Sales actually lost ground with a -0.1% vs. 0.3% estimates. However, when you look at the control group (which are inputs into PCE), they rose a hefty 0.5% vs. estimates of 0.4%. The weakness is being overlooked due to hurricane issues.
Manufacturing: The regional Fed Empire (NY) Manufacturing Index was stronger than expected (21.1 vs. estimates of 20.0).
Business Inventories: The August reading was right on target with a 0.5% vs. 0.5% estimates.
On Deck for Tomorrow: Industrial Production and Capacity Utilization, NAHB Housing Market Index and JOLTS.
Across the Pond
Japan: Industrial Production YOY +0.2% vs. est. of -1.4%
Brexit: Talks continue as Monday’s deadline has come and gone for a roadmap.