Learn from the Past
Mortgage backed securities (MBS) gained 44 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the previous week.
There was very strong economic data with ISM Services (2/3 of our economy) hitting their 4th best level in 20 years and Average Hourly Earnings beating out estimates with a YOY gain of 3.4%. But concern over Brexit, China Trade and very weak economic data out of Europe pushed MBS prices higher which inversely pushes mortgage rates lower.
We got the Big Jobs report on Friday and while the headline Non-Farm Payroll missed, overall it was very strong.
Here is the tale of the tape:
-February Non Farm Payrolls (NFP) were much lighter than expected with a reading of 20K (not a typo) vs. estimates in the 180K range. However, everyone expects that to be revised upward by 50K to 100K next time around.
-January NFP were revised upward from 304K to 311K
-December NFP were revised upward from 222K to 227K
-The more closely watched rolling three month moving average is now 186,000 which is extremely solid.
-Average Hourly Earnings YOY rose by 3.4% vs. estimates of 3.3%.
-Average Hourly Earnings MOM rose by 0.4% vs. estimates of 0.3%.
-The national average hourly rate rose by 11 cents and is now $27.66.
-The Unemployment Rate dropped from 4.0% in January to 3.8% in February, the market was expecting 3.9%.
-The number of unemployed persons decreased by 300,000 to 6.2 million.
-The Labor Force Participation Rate remained at 63.2%.
-Wow, February ISM Non Manufacturing had the 4th best reading in 20 years and handily beat market expectations (59.7) vs. estimates of 57.3). This is more important than last week’s ISM Manufacturing release as this represents more than 2/3 of our economy.
Taking it the House:
-January Building Permits were higher than expected (1.345M vs. estimates of 1.289M) and New Housing Starts also beat out estimates (1.230M vs. estimates of 1.197M).
Central Bank Palooza
The European Central Bank kept their key interest rate at 0.00% but came out with a much more dovish approach. ECB President Mario Draghi went full-dove and admitted that its forecasts were way off and revised 2019 growth expectations “substantially” lower (from 1.7% to +1.1%) and slashed all inflation forecasts with 2019 GDP at 1.1% vs. their original expectations of 1.7% and inflation of 1.2% vs. original “guestimates” of 1.6%.
What’s on the Agenda for this Week?
Brexit will keep MBS elevated all week with the potential of three different votes. However, MBS are at or near a very important technical “peak” that have been tested 2 other times this year and pulled back each time after testing it.
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Geo Political, (2) Inflation Nation and (3) Central Bank Palooza
(1) Geopolitical: Unfortunately, this category keeps getting bigger and bigger. Global bond traders are concerned about Tuesday’s most recent Brexit vote as the deadline is at the end of this month. The House of Commons is scheduled to hold a vote on the amended Withdrawal Agreement. If the vote is rejected, lawmakers will then be asked on Wednesday if the UK should take a no-deal Brexit option off the table in its negotiations. If that is rejected, then on Thursday Parliament will hold a vote on an extension to Article 50. China’s big NPC will run another week, concluding on Friday with a press conference with Premier Li Keqiang. The markets will be focused on the plans from the world’s second largest economy as well as any hint on trade talks with the U.S.
(2) Inflation Nation: PPI and CPI will both be this week. The YOY headline Consumer Price Index will carry the most weight and it is expected to remain at 1.6% with the Core CPI remaining at 2.1%. The lower these numbers are, the better it will be for pricing.
(3) Central Bank Palooza: There will be a very important Bank of Japan interest rate decision and policy statement along with a live press conference with BofJ Governor Kuroda. At home we also have some talking Feds. We hear from Fed Chair Jerome Powell in a 60 Minutes interview on Sunday and he will give a speech on Monday night. We will also hear from Fed Governor Lael Brainard.
Treasury Auctions this Week
03/11 3 year note
03/12 10 year note
03/13 30 year bond
MBS went over the “three peaks” that is very evident in the historical charts for 2019, but they could not make a run at breaking that trend at this time. Retail Sales were a real “yawner” as traders are not buying into this data set any longer. MBS have effectively moved sideways as the markets focus on Tuesday’s Brexit vote.
Retail Sales: The January data was a little better than expected with the headline Retail Sales hitting 0.2% vs. estimates of -0.1% and Retail Sales Ex-Autos at 0.9% vs. estimates of 0.3%. But December was revised even lower – from -1.8% down to -2.1% as economists keep scratching their heads trying to understand how every major retailer showed great sales in December but it is not showing up in the government data for that period.
Business Inventories: The December reading came it as expected with a gain of 0.6%.
On Deck for Tomorrow: FNMA monthly bond coupon rollover, CPI, 10Y Treasury Note Auction.
Three days of dumping debt into the market place kicked off with the 3 year Treasury Note. $38B went off at a high yield of 2.448% which was a little better than February’s auction rate of 2.502%. Demand was solid with a bid-to-cover ratio of 2.56 which is the best since 2018.