Learn from the Past
Mortgage backed securities (MBS) gained 40 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the previous week. It was a very volatile week with a huge 70 basis point swing from the worst pricing of the week to the best pricing of the week.
Mortgage rates moved to their lowest levels since October 2. There was actually very strong economic data which is generally negative for rates (growth = inflation and bonds hate inflation). But geo-political events caused overseas investors to jump into the safety trade which is any U.S. based bond until the storm or uncertainty passes. The storm was a huge uprising in France. The uncertainty was Brexit and the never ending soap opera of the U.S./China trade war.
Jobs, Jobs, Jobs
The latest Bureau of Labor and Statistics released their Big Jobs report on Friday. Here is the Tale of the Tape:
-November Non-Farm Payrolls increased by 155K vs. estimates of 200K.
-October NFP was revised from 250K down to 237K.
-September NFP was revised up from 118K to 119K.
-The more closely watched three month rolling average is 170K.
-Average Hourly Wages are now $27.35 which is a six cent increase.
-The MOM Average Hourly Earnings change increased by 0.2% vs. est. of 0.3%.
-The YOY Average Hourly Earnings increased by 3.1% vs. est. of 3.1%.
-The Unemployment Rate is 3.7% which matches expectations.
-The Participation Rate is remained at 62.9%.
-The November ADP Private Payroll hit the lower end of estimates which ranged from 161K to 195K with a 175K reading. Initial Weekly Jobless Claims were 231K vs. estimates of 220K and even though that is a low number, it is a 6 month high. The Challenger Grey Job Cuts report showed a big drop from 75K down to 53K.
–ISM: The ISM Non-Manufacturing report was red-hot with a 60.7 reading. The service sector represents more than 2/3 of our economic output. 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.
The Talking Fed
St. Louis Fed President James Bullard (non-voting member in December, but will be a voting member in 2019) and noted “dove” said that the Fed has already “normalized policy” a lot, and that “inflation is low and looks to be stable.” He had previously called for the Fed to “pause” raising rates and as a new voter in 2019, the markets are taking his commentary to mean that there will be fewer rate hikes in 2019 than previously expected. NY Fed President John Williams (number 3 at the Fed) said, “Given this outlook I describe of strong growth, strong labor market and inflation near our goal – and taking into account all the various risks around the outlook – I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and a sustained achievement of our dual mandate.”
What’s on the Agenda for this Week?
There is “nothing but fear” in the global markets right now and that will continue to keep pricing at very elevated levels. Just about everything points to great pricing, except the technicals which point to worse pricing as trading above the 100 day moving average is rare and not very long-lived.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) Central Banks and (3) Inflation Nation.
(1) Geo Political: Brexit continues to be a big part of global uncertainty. The latest is the British PM May is going to delay a key vote that would cancel the Brexit agreement put forth by May. She instead will travel to Brussels to try to get some more concessions which are unlikely and have caused traders to hedge more towards a “no deal” scenario. The next biggest story to continue to watch is China has issued a summons to the U.S. Ambassador over Huawei. In France, the protesters have not been calmed with promises to “delay” a tax hike as they are the most taxed nation among developed nations. Concern is rising that this will not only be a large economic drag on France and the EU but also shape a wave of elections that would flip several countries over to not supporting an EU at all.
(2) Central Banks: The biggest event will be Thursday’s European Central Bank’s Policy Statement and Interest Rate Decision, followed up with a live press conference with ECB President Mario Draghi. The market is not expecting any major developments though. The Federal Reserve Bank meets next week and while the markets still believe that there will be a rate hike at that meeting, non-stop speculation and reporting has the market shifting its consensus from as many as 3 rate hikes in 2019, down to zero rate hikes in 2019. Meanwhile, the Governor of India’s Central Bank has resigned causing concern over stability in one of the largest countries in the world.
(3) Inflation Nation: There will be key readings of PPI and CPI with Wednesday’s Core YOY reading getting the most weight. There will also be the Atlanta Fed Business Inflation Index. Over the weekend, China reported lower than expected inflationary data.
Treasury Auctions this Week
12/11 3 year note
12/12 10 year note
12/13 30 year bond
Concern over Brexit and France as well as a retrenchment in number/scope/path of Fed rate hikes has helped MBS stay at very lofty levels. However, every time there is any movement upward, they are “leashed” back to the 100 day.
Jobs, Jobs, Jobs: The Job Openings and Labor Turnover Survey (JOLTS) once again showed over 1 million more jobs waiting to be filled than there are people that are unemployed in the U.S. During the financial crisis, our economy had 2 million job openings (still a lot)…now we have been trending at seven million (more than three times that amount)! This October reading is the second highest on record.
The Talking Fed: The market has all but priced out any rate hikes in 2019. In fact, the possibility for even a December Rate hike has fallen to just 58%, which was 98% a month ago. And a rate hike in March was almost at a 70% probability…is now down to around 30%.
On Deck for Tomorrow: Small Business Optimism, Producer Price Index, 3 year Treasury Note auction.
Brexit: As expected, PM May had to delay her own party’s Brexit vote as it would have failed.