Learn from the Past
Mortgage backed securities (MBS) gained 39 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the previous week.
There was very strong manufacturing data but tame inflation. The bond market made their gains on the back of the Federal Reserve as the top 3 Fed members (Powell, Clarida and Williams) made a point of telling the markets that the Fed’s viewpoint is closer to their neutral rate than previously thought. That caused a shift in trader sentiment to expect fewer rate hikes next year.
The Talking Fed
The Minutes from the last FOMC Meeting were released. Here are a couple of key highlights:
- Almost all Fed officials saw another rate hike “warranted fairly soon.” But The Fed discussed modifying language on “Further Gradual” hikes while expressing its greater reliance on incoming data.
- Only a “couple” (less than a few) participants noted that the federal funds rate might currently be near its neutral level.
- Members also noted that they are worried that companies might struggle to pass on rising input costs, from current or proposed tariffs, onto consumers and create detrimental inflation.
- Fed Chair Jerome Powell spoke at the Economic Club of New York. The markets zeroed in on his phrase that the interest rate (the Fed Fund Rate) is “near” a Neutral rate.
- Vice Chair Richard Clarida said that the Fed wants the smallest balance sheet possible but thinks it will remain above the pre-crisis size of less than $1 trillion. He also said that there is still room to hike rates before hitting their target “neutral” rate but that we are not far from it.
- NY Fed President John Williams (the number 3 guy at the Fed) said that the Fed Funds rate is “not far” from the Neutral rate.
What’s on the Agenda for this Week?
This is a very important week especially on the Geo-political front. Economic data will probably have very little (if any) impact on pricing until Friday’s wage data. The bond market is CLOSED on Wednesday so look for some of the scheduled events to move around as a result. Look for MBS to continue to trade at elevated levels compared to three weeks ago but that could change on a dime in response to unscheduled geo-political events as they unfold.
The three areas that have the greatest potential to impact backend pricing this week are: (1) Jobs, Jobs, Jobs, (2) Geo-political and (3) The Talking Fed.
(1) Jobs, Jobs, Jobs:There will be a ton of jobs-related data this week with the bond market focusing on Friday’s Average Hourly Earnings data. Last month, it broke above 3.0% on YOY basis with a 3.1% reading. The market is expecting a reading at least as strong as that. If it moves higher than 3.2%, it would spark a selloff (higher rates).
(2) Geo-Political: There is a TON of big global stories this week and anyone of them could easily push pricing higher or lower. The news over the weekend is the “truce” between China and the U.S. with a 90 day period of tariff freezes while the two groups negotiate a new trade deal. While Brexit is still very much in the news, it is actually France that is stealing the European headlines with massive demonstrations of 100,000 protesting rising taxes and gasoline prices. OPEC is also taking center stage as falling oil prices have been a big factor in keeping inflation at bay in the U.S. There is an OPEC meeting on Thursday and already one member, Qatar, is saying that it will officially leave the cartel on January 1.
(3) The Talking Fed: This is a very big week that is stuffed full of speeches as we near the media blackout period prior to their December meeting. Fed Chair Powell was originally scheduled to speak on Wednesday but that has been cancelled and will be rescheduled due to the market being closed on Wednesday.
12/03 Clarida, Quarles, Williams, Brainard and Kaplan
12/05 Fed Beige Book, Powell and Quarles
Another round of strong manufacturing data (ISM) was once again largely ignored as traders focused on the cornucopia of geo-political news swirling around. In the end, MBS remained within the trading channel as there was nothing really “new” that would cause a spike in volatility.
There is still much in the air as “official” announcements seem to be coming only from the U.S. with no apparent confirmation on the Chinese side.
Manufacturing: The national ISM Manufacturing Index for November jumped to 59.3 which is the second best reading since 2004. Prices Paid dropped though from a 71.6 pace in October down to 60.7 in this release.
Construction Spending: October was weaker than expected with a contraction of -0.1% vs. expectations of +0.3%.
Kick the Can: Looks like we will once again avoid a government shutdown (originally scheduled for December 7) for two more weeks.
On Deck for Tomorrow: IBD/TIPP Economic Optimism.