Weekly Mortgage Overview: 12/16/2013

This could be a very pivotal week.  First, let’s address this morning’s early data.

We had a  mixed bag of news. Productivity rose and Unit Labor Costs dropped.  This is great for bonds….making for stuff without increasing costs is a treat for bonds because it keeps inflation at bay.  But Industrial Production and Capacity Utilization both rose which means that manufacturing and the economy are heating up which is negative for bonds.  The end result was that bonds were largely unaffected by the data.

While there are some big economic reports this week, MBS pricing (and therefore mortgage rates) will be reacting to Washington and to the Federal Reserve, not to the data.  This week is all about Wednesday’s Federal Open Market Committee (FOMC) announcement. 

Wednesday concludes two days of meetings and the FOMC will announce their policy statement and interest rate decision.  Of course, there will be no change in their interest rate.  But the focus will be on Bernanke’s last press conference as the Fed Chair and any announcement on reducing the monthly rate of their asset purchase program or at the very least, some guidance on the timing of their taper.  This will provide momentum for bond pricing for the next month and the importance of this event cannot be overstated.

We do have some shorter-term Treasury auctions this week:
12/17 – 2 year note
12/18 – 5 year note
12/19 – 7 year note

MBS are getting a lift this morning on news that the budget deal that the House passed does not have enough votes in the Senate at this time.  Passage of a 2-year budget is widely believed to be the last piece of the puzzle that the Fed needs to taper at this meeting.  But MBS are now trading above our 10-day moving average, and  actually closing above that level will be tough.   Clearly, MBS have found a temporary bottom late last week which has put a temporary stop to four straight weeks of selling off.  So, look for MBS to move sideways and even make some light gains until it appears that the Senate has enough votes to pass the budget.

What is on the agenda for this week?