Learn from the Past
Mortgage backed securities (MBS) lost 18 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher compared to the previous week.
It was another holiday-shortened week (Thanksgiving day) with really only 2.5 days of trading last week. It was a very light week for economic data and there was not any real change in trade negotiations or other geo-political issues that could impact rates. As a result, MBS moved in a very narrow and tight pattern with low volatility.
Taking it to the House: October Existing Home Sales beat out estimates with a 5.22M vs. 5.20M annualized rate. The median home price moved up again and is now $255,400. Inventory remains VERY tight with only a 4.3 month supply. New Housing Starts basically matched expectations (1.228M vs. 1.230M) and Building Permits just edged out estimates (1.263M vs. estimates of 1.260M). While both of these readings look fairly good…the problem is that the strength is in Multi-family which is where you do not want it to be. For example, multi-family units jumped by 10.3% to a 363,000 rate but single-family starts slipped by -1.8% to an 865,000 rate.
Durable Goods: The preliminary (will be revised) October headline reading was much weaker than expected (-4.4% vs. estimates of -2.5%) which was dragged down by a decrease in defense spending. The Ex-transportation number showed a small gain of +0.1% vs. estimates of 0.4%.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims hit 224K vs. estimates of 215K. The more closely watched 4 week moving average ticked up a bit to 218,500 which is still extremely low.
Consumer Sentiment Index: The final November reading changed the preliminary release of 98.3 down to 97.5 which is a good reading but the lowest since August.
What’s on the Agenda for this Week?
This is the first full week of trading in three weeks and there is a lot going on. The 100 day moving average is expected to continue to be a monster of an upper resistance level. It will take a weaker than expected Core PCE on Thursday (1.8% or below), a more “dovish” tone from Powell AND some sour words between China and the U.S. for MBS to make a run higher.
The following three areas have the greatest ability to impact backend pricing this week. (1) Geo-Political, (2) The Talking Fed and (3) Domestic Flavor.
(1) Geo-Political: Lots going on here. The EU and Great Britain have agreed on the final Brexit deal over the weekend. However, British PM May must now “sell” that deal to her cabinet members and the voters which is very difficult. The EU and Italy are still at it as well. The G20 summit will kick off on Friday and will get the most attention this week as experts are looking for some movement in trade talks between Presidents Trump and Xi. U.S. border protection is also an issue as hundreds attempt to illegally enter the U.S. President Trump has threatened to close the entire border with Mexico which would stop shipments of goods.
(2) The Talking Fed: While the Minutes from the last Fed meeting will be issued on Wednesday, the most important event is Fed Chair Jerome Powell’s speech at the Economic Club of New York as the markets are looking for some clues on if the Fed will raise rates in December or if they will stand pat. Here is the Fed schedule this week:
11/27 Richard Clarida, Ralphael Bostic, Esther George and Charles Evans
11/28 Jerome Powell
11/29 FOMC Minutes, Loretta Mester and Charles Evans
11/30 John Williams
(3) Domestic Flavor. There will be the 2nd revision to the 3rd quarter GDP, but the YOY Core PCE data on Thursday (the Fed’s key inflation rate) will get the most attention. Friday’s PMI data is very important but will be overshadowed by the G20 meeting.
Treasury Auctions this Week
11/26 2 year note
11/27 5 year note
11/28 7 year note
A nice quiet session to what could be a volatile week. There were no major economic releases and no new geo-political developments that have not been already priced in. As a result, MBS have just moved sideways – in the middle of the trading channel.
Across the Pond
Japan: Nikkei Manufacturing PMI was 51.8 vs. estimates of 52.9; Leading Economic Index 104.3 vs. estimates of 103.9.
On Deck for Tomorrow
Fed Vice Chair Clarida, Case-Shiller, FHFA Home Price Index and Consumer Confidence.