Learn from the Past
Mortgage backed securities (MBS) lost just 3 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
It was a holiday-shortened week with very little economic data that was released. Bonds across the board moved sideways as uncertainty over the Government Shutdown, China trade talks and a looming Fed meeting kept traders in a tight range, unwilling to move out of their positions (or add to them).
President Trump reached an agreement with the Democratic leadership and announced that he would agree to temporarily reopen the government for only 3 weeks and back pay would be going to government employees very quickly. Whether the 3 weeks turns into longer depends on the works of a new commission that is required to be formed as part of this deal to review all the data and proposals from agencies involved in border security. If the work of this commission lead to a new homeland security budget/bill that does include enhanced (wall) security then most likely the government will remain open past the three week period. But if not, it could be another shutdown ahead.
Central Bank Palooza
Both the Bank of Japan and the European Central Bank held their respective interest rates and announced no new significant policy changes.
Initial Weekly Jobless Claims were much lighter than expected (199K vs. estimates of 220K). This was one of the lowest readings in 50 years (despite furloughed Federal Workers), up 15K to a total of 25K. The more closely watched 4 week moving average dropped to 215K.
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.
What’s on the Agenda for this Week?
This is a huge week for economic data and geopolitical events that could really shape pricing trends for the near term. In order for there to be a material improvement in pricing, it will need this trinity – an uber-dovish Fed, GDP at 2.2% or below, and Average Hourly Earnings at 2.9% or below. That is a TALL order. While a “dovish” Fed may very well be, the other two are not very likely. The bond market is already assuming another government shutdown in 3 weeks… so that is continuing to provide some great support. However, any real progress with Chinese trade talks (intellectual property) on Wednesday could pressure pricing lower. Look for the data deluge that really hits on Wed along with the Fed meeting.
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Geopolitical and (3) Domestic Flavor.
(1) The Talking Fed: The Federal Reserve Open Market Committee (FOMC) will start two days of meetings on Tuesday which will culminate in their latest Interest Rate Decision and Policy Decision on Wednesday. Starting at this meeting, all FOMC meetings will be followed by a live press conference with Fed Chair Jerome Powell, whereas in prior years only certain meetings had live press conferences. The markets are widely expecting that the Fed will stand pat on rates this time around as they wait to see how much drag the government shutdown has had on our economy as well as slower economic growth (but still growth) overseas.
(2) Geopolitical: Brexit will continue to be in the headlines again this week, with the UK parliament voting on possible next steps on Tuesday. And Chinese Vice Premier Liu He visits Washington for trade talks on Wednesday, meeting with Treasury Secretary Mnuchin and US Trade Representative Lighthizer.
(3) Domestic Flavor: For the first time in a long time, there will be some economic data that matters. In fact, there will be a deluge of big name economic releases that have the gravitas to move the needle on pricing. There will be the first glimpse at the 4th quarter GDP, PCE (the Fed’s key inflation measure), Chicago PMI and ISM Manufacturing, Consumer Confidence and Consumer Sentiment, and a ton of Jobs data. While the number of new Non-Farm Payroll adds will likely be at half of what they were last time around, the focus is on Average Hourly Wages, which is expected to hold at 3.2%, a very high level.
Treasury Auctions this Week
01/28 2 year and 5 year note
01/29 7 year note
MBS have made a few runs upward but have failed and pulled back each time that they tested the upper resistance today. There were no major domestic economic events today.
Treasury Dump: There were two Treasury auctions today. $40B of 2 year notes went off at a high yield of 2.60% which is the lowest rate since June. Demand was lighter than recent trends with a bid-to-cover ratio of only 2.56. $41B of 5 year notes went off at a high yield of 2.576% which was the lowest since March. Demand was solid with a bid-to-cover ratio of 2.41.
On Deck for Tomorrow: FOMC meetings begin, Case-Shiller Home Price Index, Consumer Confidence and our 7 year note auctions.
Trade War: The White House has said that President Trump will be appearing at the U.S./China trade talks in Washington D.C. on Wednesday.
Brexit: PM Theresa May will seek to push through a revised Brexit package through parliament on Feb 14th.