Learn from the Past
Mortgage backed securities (MBS) gained 33 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the prior week.
There was very solid jobs data last week which would normally be very negative for mortgage rates, but offsetting that was concern that the U.S./China trade deal (a.k.a. Phase 1) was losing some steam with the cancellation of the summit in Chile. The Fed did lower their Fed Fund rate but that had little to no impact on mortgage rates. Inflation was tame (PCE) and there is continued weakness in the Manufacturing sector.
The Granddaddy of them all. The first look at the 3rd quarter GDP was much stronger than expected (1.9% vs. estimates of 1.6%). This data set will be revised several times.
The Talking Fed
The Federal Reserve Open Market Committee lowered their key interest rate by 1/4 point to 1.75% which was widely expected. You can read their official statement here.
Here are a couple of key highlights from their statement and Powell’s live comments:
• There were two dissenting votes (the two votes were against a rate decrease). Last time, there were three dissenting votes – 2 for no action and 1 for a steeper cut.
• The statement omits the familiar pledge from recent months to “act as appropriate to sustain the expansion.” Fed instead says it will monitor incoming information as it “assesses the appropriate path” of rates, which seems to be a “tip of the hat” that they are less inclined to lower rates in December.
• Fed lowered two other key interest rates by a quarter point, bringing interest on excess reserves rate to 1.55% and discount rate to 2.25%.
• Powell said, “I think we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns.”
• “The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.”
Jobs, Jobs, Jobs
It was a very solid jobs report. You can read the official BLS release here.
Tale of the Tape:
Jobs – Non Farm Payrolls (NFP):
October NFP 128K vs. est. of 89K.
September NFP revised upward from 136K to 180K.
August NFP revised upward from 168K to 219K.
The rolling three month average is now a killer 176K.
Average Hourly Earnings rose by six cents.
Earnings MOM rose by 0.2% vs. estimates of 0.3%.
Earnings YOY rose by 3.0% vs. estimates of 3.0%, September was revised upward from 2.9% to 3.0%.
The Unemployment Rate ticked up from 3.5% to 3.6% which was expected.
The Participation Rate increased from 63.2% to 63.3% (which is why the Unemployment Rate Increased).
The U6 Unemployment Rate ticked up from 6.9% to 7.0% but was below the expectations of 7.2%.
The Fed’s key measure of inflation, Personal Consumption Expenditures (PCE) were in line with expectations. The Core (ex food and energy) YOY hit 1.7% vs. estimates of 1.7%, and the Headline YOY number hit 1.3% vs. estimates of 1.4%. Personal Spending matched expectations of 0.2% but it was really a beat because the prior month was revised upward from 0.1% to 0.2%. Personal Income also matched expectations (0.3% vs. estimates of 0.3%) and again it was really a beat because the prior month was revised from 0.4% to 0.5%.
The Markit Manufacturing PMI report for October showed expansion with a 51.3 reading. But the ISM Manufacturing report of October showed another month of contraction with a 48.3 vs. estimates of 48.9 reading. Chicago PMI was dismal with a contractionary reading of 43.2 vs. estimates of 48.0.
What’s on the Agenda for this Week?
As a quick review, last week’s gains were due to this breakdown: 10% was due to weak manufacturing data, 10% was due to the Fed rate cut and 80% WAS DUE TO TRADE TALK (perceived) BREAKDOWNS. So, this week will see the most weight, once again on that 80% chunk which is trade, trade, trade. Look for that upper resistance level that held all last week, to once again be the maximum upside for this week.
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Trade War, (2) Central Bank Palooza and (3) Services.
(1) Trade War: The week starts on a bit of high note as Commerce Secretary Wilbur Ross met with Chinese Premier Li Keqiang in Bangkok on Monday. Ross says that the two sides are “very far along” with a Phase 1 trade deal. Any further movement on a concrete date and place for the next physical summit meeting and/or official announcements of agreements on larger portions of the Phase I deal will have a negative impact on pricing. Conversely, any breakdowns in talks could have a positive impact on pricing.
(2) Central Bank Palooza: The Bank of England and the Reserve Bank of Australia will issue interest rate decisions this week.
(3) Service Please: While the manufacturing sector in the U.S. and China has been weak, the Services sector has been very strong, accounting for almost 75% of our economic output. The ISM Services report is expected to once again show expansion and at a pace that is stronger than the last reading. There will also be key Services readings from China, Germany and the EU.
Here is this week’s auction schedule:
11/05 3 year note
11/06 10 year note
11/07 30 year bond
The Talking Fed
Here is this week’s speech schedule.
11/04 Neel Kashkari, Mary Daly
11/05 Robert Kaplan
11/06 Charles Evans, John Williams and Patrick Harker
11/07 Raphael Bostic
Factory Orders: The trailing, September data point dropped by -0.6% vs. estimates of -0.5%.
Across the Pond
Germany: Markit Manufacturing PMI 42.1 vs. estimates of 41.9
Eurozone: Markit Manufacturing PMI 45.9 vs. estimates of 45.7
On Deck for Tomorrow
ISM Services, JOLTS, 3 year Treasury auction, China: Caixin Services