Learn from the Past
Mortgage backed securities (MBS) gained 35 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the prior week.
Overall, the week’s economic data was strong but basically matched expectations and provided no real surprises. A “dovish” European Central Bank and concern over Brexit, Italy and midterms had plenty of money seeking bonds and caused a very slight improvement in rates.
It was first look at the 3rd quarter GDP (will be revised several times) and it was basically in line with estimates (3.5% vs. estimates of 3.3%). Estimates on Monday hovered in the 3.1 to 3.2 range and have been gradually moved upward by today to the 3.3 to 3.4 range. Consumer Spending was the major driver and that is encouraging. The next biggest driver was Government Spending. The only weak spot was a pull back in Business Investment.
Central Bank Palooza
The European Central Bank kept their main interest rate at 0.0% and their deposit rate at -0.4% which was widely expected. The unknown was what ECB President Draghi would say about Italy and the end of the quarter. During his press conference, he did not have any major “bombshells.” He did say that they have not been purchasing Greek bonds and have been purchasing Italian bonds. He cited Brexit and Italy as key risk areas but that risks to growth in the EU were “broadly balanced.”
Taking it to the House
Pending Home Sales were stronger than expected, rising 0.5% in September vs. market expectations of a pullback of -0.1% and a nice improvement over August’s pace of -1.9%. The good news is that inventory has shaken loose as active listings on the NAR MLS has increased. Weekly Mortgage Applications bounced back 4.9% led by a big jump of 10% in Refinance Applications. Purchase Applications moved upward by 2.0%. September New Home Sales were lighter than expected (553K vs. estimates of 625K) plus, August revised lower below the 600K mark. The August FHFA Home Price Index showed a MOM gain of 0.3% which matched market expectations.
The Talking Fed
They released their Beige Book which is prepared two weeks in advance of the next FOMC policy meeting.
Tariffs and Labor Shortages were the two biggest concerns among banking and business leaders in the Fed’s 12 districts. Here are some key takeaways from the release:
– The word “tariff” was used 51 times vs. 41 times in the September release and 31 times in the July release.
– All 12 districts said that the U.S. economy in their region is expanding at either a “modest” or “moderate” pace.
– Firms offered signing bonuses, flexible hours and more vacation time in order to attract and retain workers. Most businesses also expected wage gains to remain “modest to moderate” over the coming six months.
– Many firms very concerned over the ongoing trade dispute with China.
What’s on the Agenda for this Week?
With the uncertainty of midterm elections taking center stage, look for MBS to test the moving average a few times. But it will take a much weaker than expected wage report for MBS to make any real move upward; and an average hourly report showing a 3.1% or higher YOY rate, will pressure pricing.
The three areas that will get the most attention from bond traders this week and have the greatest potential to impact backend pricing are: (1) Geo-Political, (2) Central Bank Palooza and (3) Jobs, Jobs, Jobs.
(1) Geo-Political: Bond prices have crept up due in part to speculation that the Democrats may take the House and maybe even a seat or two in the Senate. This could be very negative for the economy if that does come to pass. That is why bonds have been trading higher on that prospect, which means that polling data leading into next week will get a lot of attention. Brexit and Italy continue to cause major uncertainty about the future of Europe and now we hear that Germany’s PM Merkel will not seek to be reappointed as the PM. Her term runs out in 2021 but she may have to step down before that.
(2) Central Bank Palooza: As a “hard” Brexit looms, the Bank of England will issue their latest policy statement. The Bank of Japan will also issue their latest policy statement on Wednesday.
(3) Jobs, Jobs, Jobs: There is a ton of jobs related data this week with ADP, Personal Income, Weekly Jobless Claims, Unit Labor Costs, Challenger Job Cuts, Non Farm Payrolls, Unemployment Rate and more. The YOY Average Hourly Earnings will get the most attention and a reading above 3.0% could pressure bond prices.
Wow…a HUGE 900 point intra-day swing in the stock market, but MBS were completely insulated from any volatility whatsoever. There was inflation (PCE) right at the Fed’s target level of 2.00% but that is exactly what was expected, so it did not impact pricing. Overall, a really tame session for MBS.
Inflation Nation: The Fed’s key inflation measure remained right on target. The September Core (ex food and energy) YOY PCE reading was 2.0% vs. estimates of 2.0%. Personal Income MOM rose by 0.2% vs. estimates of 0.4% and Personal Spending MOM increased by 0.4% vs. estimates of 0.4%. Overall, this report was what the market expected.
On Deck for Tomorrow: Case-Shiller Home Price Index, Consumer Confidence.