Learn from the Past
Mortgage backed securities (MBS) gained just 5 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to remain at the same levels compared to the prior week.
Overall, it was another week of very solid economic data with strong readings in the Services and Labor sectors, which would normally be negative for mortgage rates. But more than offsetting the strong economic data was geopolitical concern which drove up demand for U.S. long bonds and helped to keep mortgage rates low for yet another week.
It was Big Job’s Friday!
Tale of the Tape:
December Non Farm Payrolls increased by 145K which was below estimates of 164K.
November NFP revised lower from 266K down to 256K.
October NFP revised lower from 156K down to 152K
The rolling 3 month average is now a respectable 184K
The average hourly rate increased by 3 cents to $28.32
Average Hourly Earnings MOM increased by 0.1% vs. est. of 0.3%
Average Hourly Earnings YOY increased by 2.9% vs. of 3.1%
The Unemployment Rate remained at 3.5%
The Participation Rate remained at 63.2%
The U6 Unemployment Rate dropped from 6.9% down to 6.7%
Services: ISM Non Manufacturing PMI for December hit 55.0 vs. estimates of 54.5, the best reading since August. This represents more than 2/3 of our economic output. Any reading above 50.0 is expansionary.
Factory Orders: November orders shrank by -0.7% but that was actually better than market expectations of -0.8%.
On the U.S./Iran/Iraq front, there were a few developments that “spooked” bonds. First, is the fact that Iran once again attacked U.S. military installations just north of Baghdad with rocket(s). Secondly, it was confirmed that the Ukrainian 737/800 jet was downed by an Iranian missile. The vast majority of the passengers were Canadian (there were no U.S. passengers). It very well may have been struck down in error by Iran but none-the-less it is an issue.
What’s on the Agenda for this Week?
The only way for some material MBS pricing improvement this week is if there is a flare up between Iran and the U.S. Everything else points to worse pricing with a potential trade deal signed on Wednesday and movement in the Brexit process. Look for a -12 to -21 BPS change today barring any unscheduled geopolitical event.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade Wars, (2) Geopolitical and (3) Domestic Flavor
(1) Trade Wars: It is expected that the U.S. and China will sign the Phase 1 trade deal on Wednesday. At that point, the markets should have all of the final details of exactly what is in (and what is not in) the trade deal.
(2) Geopolitical: Brexit is very much on the bond market’s mind as the January 31st deadline is fast approaching. While the Brexit deal has made it out of the lower chamber, Monday kicks off with the House of Lords beginning debates on the Brexit Withdrawal Agreement Bill. On the Iranian front, military escalation seems to have abated but that could turn on a dime and bonds will continue to be very reactive to any action(s).
(3) Domestic Flavor: Retail Sales and CPI will get the most attention. The stronger these reports are, the worse it will be for pricing.
The Talking Fed
Here is the Fed’s schedule this week:
01/13 Eric Rosengren, Raphel Bostic
01/14 John Williams, Esther George
01/15 Patrick Harker, Robert Kaplan, Fed’s Beige Book
01/16 Michelle Bowman, Fed’s Balance Sheet
01/17 Randal Quarles
There were no domestic events today.
On Deck for Tomorrow: CPI, Business Optimism.
Across the Pond
Great Britain: MOM GDP -0.3% vs. estimates of 0.0%.