Learn from the Past
Mortgage backed securities (MBS) gained just 10 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
MBS moved in a very well defined and tight range. There was strong housing data but the markets focused on the Fed and on Trade. The Federal Reserve released their Minutes from their last FOMC meeting and it really didn’t contain any surprises for bond traders. Trade meetings in D.C. appeared to be making progress, particularly near the end of the week.
Taking it to the House
January Existing Home Sales came in at 4.94M units vs. estimates of 5.00M. So, a slight miss but December was upgraded from 4.99M to 5.00M.
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.
The February NAHB Housing Market Index was much stronger than expected, shooting up from 58 in January to 62 in February. The market was expecting a reading of 59. Any reading above 50.0 is positive. All regions, with the exception of the North East, had positive gains.
The Talking Fed
They release their Minutes from the last FOMC meeting. Here are a few highlights:
• Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year.
• The Fed will remain patient in light of ambivalent economic and market data.
• The Fed’s outlook for the economy and the policy rate have both become more uncertain.
• Keeping the current policy rate for now “posed few risks.”
• As various Fed speakers noted recently, higher than expected inflation may be a requirement for more rate hikes.
• The Fed was worried that the dot plot – which has become a Fed forecasting farce – is being “misinterpreted.”
• Many participants commented that upward pressures on inflation appeared to be more muted than they appeared to be last year despite strengthening labor market conditions and rising input costs for some industries.
What’s on the Agenda for this Week?
This week the technical overhead resistance is quite strong and has been tested for the past two weeks. For there to be better pricing, the GDP report would need to be below 2% AND a huge break-down in the Trade talks and both of those happening this week would be very low odds. If the GDP report is above 2.5%, there will be some pressure on pricing and if a firm date is set for the Mar-a-Lago meeting, that will pressure pricing as well. Difficult to justify any risk taking here.
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Trade War and (3) Domestic Flavor
(1) The Talking Fed: Fed Chair Powell will give his semi-annual monetary report to the Senate and House this week. There will also be a lot of talking feds this week. Bond traders will be looking for more discussion on the path of expected inflation and on the timing of the balance sheet wind-down.
02/26 – Jerome Powell – Senate
02/27 – Jerome Powell – House
02/28 – Richard Clarida, Raphael Bostic, Robert Kaplan and Patrick Harper
(2) Trade War: President Trump has postponed the March 1st deadline that would have increased tariffs on $200B of Chinese imports from a rate of 10% to 25% citing “substantial progress” in trade negotiations and said that they are currently working on a summit in March where Presidents Trump and Xi would sign an agreement in Mar-a-Lago. North Korea is also front-and-center as President Trump heads to Vietnam for a summit with Kim Jong Un. Also, the United States is looking to hit the EU with auto tariffs with the EU vowing to retaliate.
(3) Domestic Flavor: For a refreshing change of pace, there will actually be some big-name reports that have the gravitas to move pricing this week. The stronger these reports are, the worse it will be for pricing; the worse that they are, the better it will be for pricing. The “biggies” this week are the preliminary 4th quarter GDP, PCE and ISM Manufacturing.
Treasury Auctions this Week
02/25 – 2 year and 5 year note
02/26 – 7 year note
It was a mild opening to the week with nothing but lower level economic data that had no ability to impact pricing, and there really wasn’t any new trade news other than what happened on Sunday. As a result, MBS have traded in a very narrow range with no reward for taking any risk ahead of Powell’s report in front of the Senate committee tomorrow.
Wholesale Trade: The preliminary Wholesale Trade data for December was almost three times higher than market expectations (1.1% vs. estimates of 0.3%).
Dallas Fed: Their February regional Manufacturing Survey hit 13.1 vs. estimates of only 4.8
Treasury Dump: There were two auctions today, the 2 year and 5 year notes. The 5 year was very weak. $41B went off at a high yield of 2.489% which is a slight improvement over January’s at auction yield of 2.576% but demand was weak with a bid-to-cover ratio of only 2.42.
On Deck for Tomorrow: Fed Chair Powell gives his monetary policy report to the Senate, Housing Starts and Building Permits, 7 YR Treasury Note auction, Case-Shiller Home Price Index, Consumer Confidence.
Across the Pond
Trade War: President Trump has postponed the March 1st deadline that would have increased tariffs on $200B of Chinese imports from a rate of 10% to 25% citing “substantial progress” in trade negotiations and said that they are currently working on a summit in March where Presidents Trump and Xi would sign an agreement in Mar-a-Lago.
Japan: Leading Economic Index 97.5 vs. estimates of 97.9.