Learn from the Past
Mortgage backed securities (MBS) lost 26 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher compared to the previous week.
Overall, the continued Government shutdown and the resounding defeat of the Brexit vote were very bond-friendly and supportive of low rates. But the heightened optimism of a China/U.S. trade deal pressured bond pricing and pushed global interest rates a little higher last week.
Consumer Sentiment: The Preliminary University of Michigan’s Consumer Sentiment Index was much lower than expected with a 90.7 vs. 97.0 reading which is the lowest since October 2016. But this is just a preliminary reading and will be revised.
Taking it to the House: Weekly Mortgage Applications improved by big numbers for the second consecutive week, this time by 13.5%, led by a big jump of 19.0% in Refinance Applications. Purchase Applications improved by 9.0%. The NAHB Home Builders Housing Market Index was stronger than expected with a 58 vs. 56 reading.
Reports hint that at the last meeting between Chinese and U.S. trade representatives in early January, China offered to erase the trade deficit by upping its purchase of goods from the U.S. by one trillion dollars through 2024. However, it does not appear that they have addressed/agreed to change their rampant intellectual property theft.
The Talking Fed
The Fed’s Beige Book that is prepared specifically for the use of this month’s FOMC Interest Rate meeting. Overall, the 12 individual Fed districts showed that the U.S. economy continues to show growth albeit at a slower clip than some recent quarters. Here are some key highlights:
– All districts noted that labor markets were tight and that firms were struggling to find workers at any skill level, the report said, adding that wages gained throughout the country and across skill levels, with most districts reporting moderate pay increases.
– Economic activity increased in most of the U.S., with eight of twelve Federal Reserve Districts reporting modest to moderate growth.
– The word “tariff” was used less times in this report. It was only mentioned 20 times vs. December’s count of 39 and October’s level of 51.
What’s on the Agenda for this Week?
This is a very light week for domestic economic data with nothing out there with the gravitas to impact pricing. All the momentum will come solely from geopolitical fronts. Absent of any shifts from recent news, look for MBS to trend sideways ahead of next week’s FOMC meeting.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) Trade War and (3) World Economic Forum.
(1) Geopolitical: Now that the Brexit vote has failed, PM Theresa May is working to gain support for “Plan B” from her opposition leaders to have enough votes to move forward. This is a plan that is not approved by the EU, so that may be a short trip.
Domestically, we continue to have yet another week of the government shutdown and each week that it drags on, incrementally it is weighing on economic growth as there is less spending by employees, etc.
(2) Trade War: After last week’s revelation that China was willing to spend its way out of the trade war, will there be any progress or announcements this week on the real issues at the core of the trade war?
(3) World Economic Forum: The World Economic Forum is underway in Davos, Switzerland. While President Trump has canceled the trip, there are plenty of major hedge fund players, world leaders, etc,. that will have sound bites for the markets.
MBS did have a smidge of volatility on non-stop news wires that a meeting between China and the U.S. was cancelled but actually that was not true…as a result MBS returned to trade at their levels before the erroneous news story and are now trading sideways, right in the middle of our intra-day trading channel.
Taking it to the House: December Existing Home Sales were lighter than expected (4.99M units on an annualized basis vs. estimates of 5.25M). But that doesn’t mean it was a bad report. Actually, there were many very strong components of the report. The median existing-home price for all housing types in December was $253,600, up 2.9% from December 2017 ($246,500). December’s price increase marks the 82nd straight month of year-over-year gains.
Total housing inventory at the end of December decreased to 1.55 million, down from 1.74 million existing homes available for sale in November, but that represents an increase from 1.46 million a year ago. Unsold inventory is at a 3.7-month supply at the current sales pace, down from 3.9 last month and up from 3.2 months a year ago. Properties typically stayed on the market for 46 days in December, up from 42 days in November and 40 days a year ago. 39% of homes sold in December were on the market for less than a month.
On Deck: Weekly Mortgage Applications, FHFA Home Price Index and the Richmond Fed Manufacturing Index.
Trade War: There were numerous “news” reports that an important trade meeting with China was cancelled. But actually it was not true. The next scheduled meeting is in China and has not changed. There was discussion about setting up a meeting before then if (and only if) China presented the U.S. with acceptable policy changes on intellectual property. China has not done so as of yet and they were under no deadline to do so. Just a great example how a story can have “legs” when it’s not representative of what was really not-scheduled.
Bank of Japan interest rate decision is tomorrow.