Learn from the Past
Mortgage backed securities (MBS) gained 47 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the previous week. There was some volatility with a swing of 80 BPS from the worst pricing to the best pricing of the week
MBS, which control mortgage rates, moved higher for the week (mortgage rates moved lower) on concern over a second government shutdown and a much more “dovish” Fed that market participants interpreted as they would not move on rates for at least six months (but that is not what the Fed said). But bonds moved off of their best levels in response to a very strong jobs report as well as a very strong manufacturing report on Friday.
Government Shutdown Showdown
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 works 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.
The Talking Fed
The FOMC kept their key interest rate unchanged in the 2.25% to 2.50% range. They also spent a lot of time communicating to the markets their view of using their balance sheet as a monetary policy tool.
Here are some key highlights from the policy statement:
• They are and are going to be “patient” on any further action. “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”
• The case for raising interest rates has “weakened.”
• The Fed removes a statement about “some further gradual increases.”
• The line about “balance of risks” is also removed, replaced by a line about policy “patience amid muted inflation and global economic and financial developments.”
• The Committee continues to view changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.
• The Committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.
• The U.S economy is growing well but there are headwinds from overseas.
• Labor market strengthened, unemployment remained low.
• Spending grew strongly, investment moderated.
• Core and Headline inflation “muted” and likely to remain near 2%.
During Fed Chair Powell’s live press conference, he said the government shutdown will have an “imprint” on the 1st quarter GDP but that “We don’t know the ultimate resolution of it. If that’s all there is and the shutdown is gone and there isn’t another shutdown, we’ll get most of [the lost growth] back in the second quarter.” He also said that the Brexit outcome could have major market implications.
Big Jobs Friday is here. Let’s look at the Tale of the Tape!
• Non Farm Payrolls for January hit 304K vs. estimates of 165K.
• December was revised from 312K down to 212K.
• November was revised from 176K up to 196K.
• The more closely watched 3 month moving average is a robust 241K.
• This is now the 100th consecutive month of job gains.
• The Average Hourly Earnings YOY remained at 3.2% which matched December’s pace and market estimates.
• The Average Hourly Earnings rose by 3 cents and is now $27.56.
• The survey rate ticked up from 3.9% to 4.0%. The market was expecting 3.9%.
• The Participation Rate increased from 63.1% to 63.2%.
• The January ISM Manufacturing Index hit 56.6 vs. estimates of 54.2. Prices Paid came in at 49.6 vs. estimates of 54.5.
What’s on the Agenda for this Week?
Look for MBS to continue to pull back from last week’s intra-day highs on Thursday unless there are some unexpected geopolitical news/events that would cause a spike in the “flight to quality” trade. Barring that, the economic data is not likely to support better pricing from last week.
The three areas that have the greatest ability to move the needle on backend pricing this week are: (1) Talking Heads, (2) Domestic Flavor and (3) Geopolitical
(1) Talking Heads: We will hear from two world figures when it comes to the economy. President Trump will have his State of the Union speech on Tuesday at 9:00 pm EST and Fed Chair Jerome Powell will speak Wednesday night at 7:00 pm EST at a town hall style meeting in D.C.
(2) Domestic Flavor: This is a very light week for economic data but there will be one key report. ISM Services will get a lot of attention. Last Friday’s stronger than expected ISM Manufacturing report definitely pushed MBS pricing lower. But that report ONLY covers 1/3 of our economy. The other 2/3 is covered in this Tuesday’s ISM Services report.
(3) Geopolitical: China is shut down due to the Chinese New Year, so there won’t be any economic releases from them (weaker PMI data out of China definitely helped MBS pricing last week). Also, that means that there will not be very much movement on the Trade negotiations. The markets will continue to be very reactive to Brexit news as well as any movement if there is a next round of government shutdowns.
Treasury Auctions this Week
02/05 3 year note
02/06 10 year note
02/07 30 year bond
It was a very light open to the markets this week with very little economic data and no real change in any of the major geopolitical stories. The bond market needed a new dose of “fear” to make any movement higher, and there simply wasn’t anything new today to do that.
Factory Orders: The November U.S. Factory Orders were lighter than expected (-0.6% vs. estimates of +0.2%) but were a nice improvement over October’s pace of -2.1%.
On Deck for Tomorrow: ISM Non Manufacturing (Services), 3 year Treasury note auction.
Just for Fun: Each member of the winning Super Bowl team, the New England Patriots, gets a $118,000 bonus (on top of their salary). Each member of the losing team, the L.A. Rams, gets $59,000.
Across the Pond
China: Chinese New Year.
Eurozone: PPI YOY 3.0% vs. estimates of 3.2%.