Learn from the Past
Mortgage backed securities (MBS) lost just 5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at the same levels compared to the prior week.
Two big trade deals were resolved (China and Mexico/Canada) that lock down deals with our three largest trading partners. There was some very tame inflationary data and solid housing data. There were also a few bright spots in some regional manufacturing reports as well as a benign Fed Beige Book.
The USMCA trade deal (U.S./Mexico/Canada) passed the Senate and is now finally put to rest. The U.S./China Phase One Trade deal was signed on Wednesday.
Taking it to the House: The January NAHB Housing Market Index matched market expectations of 75 which is very strong considering any reading above 50.0 is positive. The December New Housing Starts was fantastic, rising 16.9% to an annualized basis of 1.608M units vs. estimates of 1.375M. Building Permits were 1.416M vs. estimates of 1.468M
Retail Nation: Retail Sales were much stronger than expected with the key Ex-Autos figure showing a MOM gain of 0.7% vs. estimates of 0.5%. The headline Retail Sales data matched market expectations with a gain of 0.3%, but it’s really a small beat due to the upward revision in November.
Inflation Nation: The December Consumer Price Index (CPI) YOY headline reading matched market expectations with a gain of 2.3%, which was an increase over November’s YOY pace of 2.1%. The Core (Ex food and Energy) YOY reading also matched expectations of 2.3%.
Manufacturing: The January Philly Fed Manufacturing Index blew the doors off of estimates with a 17.0 reading vs. an expected 3.8.
Jobs: The November Job Openings and Labor Turnover Survey (JOLTS) was much lighter than expected (6.800M vs. estimates of 7.233M) and was the first time below 7M unfilled jobs since November 2018.
Consumer Sentiment: The Preliminary January reading was fairly strong at 99.1, the market was expecting 99.3. The one year inflation outlook rose from 2.3% to 2.5%.
What’s on the Agenda for this Week?
This is a holiday-shortened week that will be focused on Central Bank action and geopolitical concerns. The global economic data will not be a factor in pricing. Experts continue to expect MBS levels to be very elevated but also warn to stay away from pricing at or near the 101.83 level.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bank Palooza, (2) Geopolitical and (3) Davos.
(1) Central Bank Palooza: There will be key interest rate decisions and policy statements from the world’s largest economies this week:
01/21 People’s Bank of China
01/22 Bank of Japan
01/23 Bank of Canada
01/24 European Central Bank
(2) Geopolitical: There are a lot of big stories that will get a lot of attention from bond traders. In the U.S. it’s the Senate Impeachment process, in Europe the Brexit deadline is in only 10 days, in China it’s the zombie-plague (Coronavirus) outbreak, and there is plenty of uncertainty to go around with Iran, Iraq and Syria.
(3) Davos: The World Economic Forum has kicked off in Davos, Sweden, and we will hear from major leaders, bankers, central bankers and economists.
There were no domestic events today.
Central Bank Palooza
The Bank of Japan (3rd largest economy) kept their key interest rate at -0.1%. On Monday (bond market was closed), the People’s Bank of China (2nd largest economy) kept their key interest rate at 4.15%.
The Chinese Coronavirus (sounds like something you get on spring break) now has a confirmed case in the U.S. and markets are very concerned about containment. SARS caused about $80B in lost global economic growth.
Great Britain: Unemployment Rate 3.8% vs. estimates of 3.8%.
On Deck for Tomorrow
Bank of Canada interest rate decision, Weekly Mortgage Applications, Existing Home Sales, FHFA Home Price Index.