Learn from the Past
Mortgage backed securities (MBS) gained 33 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the prior week.
It was another holiday-shortened week. The economic data was a mixed bag with very strong consumer and construction data but continued weakness in manufacturing. The biggest movement was on Friday as long bonds rallied which pushed mortgage rates lower. This was due entirely to investors putting money in the safe-haven of U.S. long bonds due to military escalation with Iran.
Manufacturing: The December ISM Manufacturing PMI was weaker than expected (47.2 vs. estimates of 49.0) but the Prices Paid (a key measure of inflation) shot up to 51.7 vs. estimates of 47.5. The December Chicago PMI improved from November’s pace of 46.3 to 48.9 and just edged out estimates calling for a level of 48.0. But this marks the 4th month in a row with a reading below 50.0.
Construction Spending: The November data showed a MOM big pickup of 0.6% vs. estimates of 0.3%, plus there is a huge revision to October from -0.8% to +0.1%.
Jobs: The Challenger-Grey Job Cut Report showed a big drop in announced corporate layoffs from 44,569 in November down to 32,843 in December. Initial Weekly Jobless Claims came in at 222K vs. estimates of 225K. The more closely watched 4 week moving average increased to 233,250.
Consumer Confidence: The Conference Board’s December survey came in at 126.5 vs. estimates of 128.0 which is a nice gain from November’s reading of 125.5.
The Talking Fed
The Minutes from the last FOMC meeting were issued. There were no surprises or details that had not been expected. You can read the official release here.
What’s on the Agenda for this Week?
The reason for the run up in pricing at the end of last week was solely due to a flight to safety. There does not appear to be much of a chance of those concerns abating this week which means very elevated pricing this week as well. It would take a big de-escalation between Iran/Iraq and the U.S. for MBS to sell off.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geopolitical, (2) Trade War and (3) Jobs, Jobs, Jobs.
(1) Geopolitical: All eyes are on Iran/Iraq and the rest of the Middle East. As tensions and threats rise, the long-bond market will continue to see an inflow of capital. Also in the market’s sites is Brexit as the Labour Party (the party that lost the recent election) looks to replace its leader and how that will impact the Brexit proceedings.
(2) Trade War: Last week saw an announced signing of a Phase 1 deal as supposedly Saturday, then it was moved to January 15th. The markets will be reactive to any real confirmed date.
(3) Jobs, Jobs, Jobs: Friday’s BLS report will get the most attention for the week as far as economic data is concerned. Bond traders will focus the most on the inflationary aspect of the report which is Average Hourly Earnings. Any reading on a YOY basis above 3.3% would be negative for pricing. The market is expecting a slightly lower level than that though.
Services: The December Markit ISM Services PMI was stronger than expected (52.8 vs. estimates of 52.2).
Trade War: No new traction or confirmed time tables have been announced.
Iran: While the markets have all been “on edge” over U.S. vs. Iran, so far today there have been no new escalations from this weekend.
On Deck for Tomorrow
Trade Balance, Factory Orders, ISM Services and 3 year Treasury note auction.