Learn from the Past
Overview
Mortgage backed securities (MBS) gained 10 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to remain at or near the same levels as the prior week.
It was a very big week! Our Federal Reserve kept their key interest rate unchanged and told the market that they expected to not touch their Fed Funds rate until 2021. The other Central Banks also stood pat. Brexit is back on track with the Conservative Party wining a landslide victory in the UK and picking up more than enough seats to finally leave the EU. A phase one trade deal with China was announced but it’s not signed and details keep emerging on what it really does and does not contain.
The Talking Fed
The FOMC released their Interest Rate Decision and Policy Statement. You can read the official release here. The FOMC also released their Economic Projections. You can read their economic projections here.
Here are some key points:
• They kept their key interest rate in the 1.50% to 1.75% rate which is unchanged from the prior Fed meeting.
• The vote was 10-0.
• Says rates are currently “appropriate” to support growth, jobs and inflation, while the statement omitted prior language that said “uncertainties about this outlook remain.”
• Their dot plot chart derived from their Economic Projections show that their rate projections from 13 out of 17 officials expect no change in their key interest rate through the end of 2020. Most see higher rates as likely in 2021, with a further increase expected in 2022.
• The FOMC said the labor market and household spending were strong, while business investment and exports were weak. The Fed said it will continue to monitor information “including global developments and muted inflation pressures.”
• The Fed lowered their Unemployment Rate from 3.7% down to 3.5% for 2020 and the longer run Unemployment Rate from 4.2% to 4.1%.
• GDP forecasts remained unchanged: 2019 2.2%, 2020 2.0%, 2021 1.9% and 2022 1.8%.
Inflation Nation
The November Consumer Price Index (CPI) was in line with estimates as the Core (ex food and energy) YOY reading was 2.3% vs. estimates of 2.3%. The Headline YOY CPI was a tick higher 2.1% vs. estimates of 2.0%
Retail Sales
November Retail Sales were lighter than expected with a headline MOM reading of 0.2% vs. estimates of 0.4%. However, October was revised upward to 0.4%. When you strip out Autos, Retail Sales grew at monthly pace of only 0.1% vs. estimates of 0.4%. October was revised higher to 0.3%.
What’s on the Agenda for this Week?
Overview
Number 1 of the three things is very important. The bond market IS NOT pricing in a phase one trade yet as there really isn’t one until it is signed which will not be until January at the earliest, and the parties have walked away before. If more verified details emerge about the phase one deal, then MBS will see a little pressure.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade, (2) Central Bank Palooza and (3) Inflation Nation.
(1) Trade Wars: Phase one done, well kinda maybe. The bond market is looking for more detailed and verified details about this deal that is as of yet NOT signed by both parties. This still has the very real possibility of coming together or moving further apart even though the talking heads on TV continue to discuss what may or may not be in phase two.
(2) Central Bank Palooza: There are very important central bank meetings on Thursday. The Bank of Japan with their negative interest rate (which has been a disaster for them) will be key, but probably more focus will be on the Bank of England which finally has clarity on the timing of Brexit and may choose this time to act.
(3) Inflation Nation: Friday’s PCE report will provide what the Fed considers its main gauge on inflation which has been stubbornly below 2%. Bonds will be very sensitive to any uptick in this data set.
The Talking Fed
The following is this week’s schedule.
12/17 Robert Kaplan, John Williams, Eric Rosengren
12/18 Charles Evans
Market Wrap-up
Taking it to the House
The December NAHB Sentiment Index reached a 20 year high with a reading of 76.
Manufacturing
The NY Empire Manufacturing index was lighter than expected (3.5 vs. 4.0). The Markit Manufacturing PMI was on target with a reading of 52.5.
On Deck for Tomorrow
Housing Starts and Building Permits, Industrial Production and Capacity Utilization and JOLTS.