What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) gained +50 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to decrease from the prior week. We saw the best rates on Wednesday and the worst rates on Tuesday.
Last week’s trading activity: Fannie Mae 3.50% October MBS was dominated by two very specific sessions, Wednesday and Friday.
On Wednesday, MBS shot up +60BPS and the best pricing (and therefore lowest rates). This was due to the powerful combination of weaker than expected U.S. ISM Manufacturing and Construction Spending combined with very weak European data. Germany posted their first manufacturing contraction in 15 months and the overall European PMI was weaker than expected. This signals a global slow-down and bonds always rally on weak economic data.
On Friday, MBS tanked -32BPS before recovering some of those losses on the better than expected U.S. Jobs data. September’s Non-Farm Payroll was much better than expected (248K vs estimate of 215K) but more importantly, the August data was revised upward from 142K to 180K. The Unemployment Rate dropped below 6% but traders didn’t pay too much attention to that data point because a major component of that calculation, the Participation Rate, dropped to a 36-year low which is skewing the Unemployment Rate. There was also a stronger than expected ISM Non-Manufacturing number (2/3 of our economy).
So, there was a rally on Wednesday on weaker than expected data and a sell-off on Friday on stronger than expected news. Actually, Wednesday’s U.S. data did show expansion at a pretty good clip, it was just weaker than expected. But the bond market (and therefore mortgage rates) were ultimately the benefactor of global economic weakness and geo-political concern over protests in Hong Kong, the ECB (in)action on Thursday and ISIS escalations.
What’s on the agenda for this week?
This is a light week for economic data and starts off with a big “yawn” as Monday has no major (or minor) economic releases to digest.
German Factory Orders tanked -5.7%, which was much worse than market expectations of -2.5% and is helping MBS stay at elevated levels in early trading.
The two biggest domestic releases this week will be Wednesday’s minutes from the last FOMC meeting and Thursday’s Wholesale Inventories which will feed into everyone’s 3rd quarter GDP estimates.
There is a large amount of Treasuries to absorb with three auctions this week. However, these are unlikely to dictate MBS pricing as both are already reflective of the sentiment of bond traders.
Treasury auctions this week:
10/07 3 year note
10/08 10 year note
10/09 30 year bond
10/07 Kocherlakota, Dudley and Bernanke
Key events to watch overseas:
Hong Kong: The pro-democracy protestors have petered off as students and workers returned to their campuses and jobs. Key barricades have been removed around government offices but the markets will continue to pay attention to any escalation or change in China’s position on elections and governance.
ISIS: They are still making some territorial gains despite our air campaign, which is causing many to speculate that “boots on the ground” is needed. Regardless, this will continue to be closely watched by the financial markets.
Ebola: It’s a big deal overseas, as the death toll in African countries is approaching 4K. And as we are concerned about one confirmed case in the U.S., the market’s attention is shifting to increased projections of Ebola spreading to European countries more rapidly than the U.S. due to travel patterns. This could weigh on an already fragile economy.