Weekly Mortgage Overview: 10/7/2019

Learn from the Past

Overview

Mortgage backed securities (MBS) gained +42 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the prior week.

Mortgage rates moved lower after the one-two punch of weaker than expected manufacturing and services data which raised expectations for the potential of two more rate cuts by the Federal Reserve this year. There was a very solid jobs report on Friday with a new 50 year low for Unemployment (3.5%).

Domestic Flavor

Services: The National ISM Services PMI was weaker than expected (52.6 vs. estimates of 55.0). While any reading above 50 is still expansionary (meaning that the services sector which accounts for 85% of our economic output, grew last month) it is the slowest rate of growth since 2016.

Manufacturing: The September National ISM Manufacturing PMI hit 47.8 vs. estimates of 50.1 which is the lowest (worse) level since 2009. Prices Paid hit 49.7 vs. estimates of 45.5.

Jobs: We got the Big Jobs report on Friday You can read the official BLS release here.

Here is the tale of the tape:

Jobs:

• September Non-Farm Payrolls (NFP) increased by 136K vs. expectations in the 140K to 145K range.
• August NFP was revised upward from 130K to 168K
• July NFP was revised upward from 159K to 166K
• The more closely watched rolling three month average is 157K which is very attractive.

Wages:

• The Average Hourly Earnings are $28.
• The MOM change is 0.0% vs. market expectations of 0.3%
• The YOY change is 2.9% which is lower than the recent trend of 3.2%

Unemployment:

• The headline Unemployment Rate dropped to 3.5%, the lowest in 50 years. The market was expecting it to remain at 3.7%.
• The U6 Unemployment Rate dropped to 6.9% in a very rare appears below the 7.0% mark. The last month was at 7.2%
• The Participation Rate remained at 63.2%

The Talking Fed

Fed Chair Powell spoke on Friday.

Here are a few key sentences from the speech:

• “Unemployment is near a half-century low, and inflation is running close to, but a bit below, our 2% objective,” Powell says without directly addressing Friday’s jobs report.

• “While we believe our strategy and tools have been and remain effective, the U.S. economy, like other advanced economies around the world, is facing some longer-term challenges — from low growth, low inflation, and low interest rates.”

• “Low can be good, but when inflation — and, consequently, interest rates—are too low, the Fed and other central banks have less room to cut rates to support the economy during downturns.”

What’s on the Agenda for this Week?

Overview

Three Things

The three areas that have the greatest ability to impact backend pricing this week are: (1) The Taking Fed, (2) Trade War and (3) Geopolitical.

(1) The Talking Fed: Fed Chair Powell will speak no less than three times this week. The Minutes from the last FOMC meeting will also be released, and there will be a barrage of talking feds all week.

10/07 Powell, Kashkari
10/08 Powell, Evans, Kashkari
10/09 Powell, George, FOMC Minutes
10/10 Mester
10/11 Rosengren, Kaplan

(2) Trade War: Chinese Vice Premier Liu He is due to visit Washington for talks with meetings expected to take place on Thursday and Friday. According to news reports, the Chinese are “increasingly reluctant to agree to a broad trade deal” and that the “range of topics they’re willing to discuss has narrowed considerably.” The same reports claim that Vice Premier Liu He is likely to bring an offer that won’t include commitments on reforming Chinese industrial policy or government subsidies that have been the target of longstanding US complaints. Direct reports from the White House and Chinese delegation could have a huge impact on market sentiment later this week.

(3) Geopolitical: The three-ring circus of the Impeachment “inquiry” will get a lot of attention as well as the drama from across the pond with Brexit negotiations. Both have seen massive media coverage amid new developments; both will feature heavily this week.

Treasury Auctions this Week

10/08 3 year note
10/09 10 year note
10/10 30 year bond

Market Wrap-up

Domestic Flavor

Consumer Credit: The August release came in at $17.9B vs. estimates of $17.0B. When you strip out auto loans and student loans, the Revolving Credit dropped by -$1.9B.

On Deck for Tomorrow: Fed Chair Powell, Small Business Optimism Index, Producer Price Index, 3 year Treasury Note auction.

The Talking Fed

Fed Chair Jerome Powell spoke at a film premier but did not address monetary policy. The film commemorated Marriner Eccles, who led the Fed from 1934 until 1948.

Across the Pond

Germany: Factory Orders -0.6% vs. estimates of -1.5%.