What happened last week?
Mortgage Backed Securities (MBS) Overview – Learn from the Past
MBS lost -18 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move slightly higher from the prior week. This was the second straight week of MBS pricing declines (and therefore higher mortgage rates) after five straight weeks of improvement.
This was a very interesting week for economic news and data:
On the housing front, Pending Home Sales picked up 0.3% and the Case-Shiller Home Price Index increased by 5.6% which showed some nice and mild momentum in the housing market.
On the manufacturing front, Durable Goods Orders were much weaker than expected (-1.3% vs estimates of 0.5%). But the Chicago PMI had a block-buster reading of 66.2 which shows very strong expansion in our economy.
Consumers are certainly more optimistic as two separate reports showed better than expected results. Consumer Confidence moved upward to a very high reading of 94.5 when the market only expected 87.0 and The Consumer Sentiment Index was revised upward to 86.9 vs estimates of 86.4.
The two biggest events were GDP and the Fed. The preliminary 3rd quarter GDP data was very strong at 3.5% (this number will be revised 2 times), which has long-bond traders thinking that there is very strong momentum going into the 4th quarter.
The Federal Reserve Open Market Committee (FOMC) didn’t really provide any surprises to the long-bond market during Wednesday’s release of their interest rate decision and policy statement. As expected, they formally announced the end of their massive QE program of purchasing U.S. Treasury and agency MBS each month. (Side note…they are still purchasing right now but their last check will be written in November.) They also reiterated that they will not begin to raise rates until the data supports it. This has traders focusing on this week’s manufacturing and jobs data very intently.
What’s on the agenda for this week?
This is a very important week that could prove very pivotal in the longer term trend of MBS pricing with big-time manufacturing and jobs data.
Tomorrow are mid-term elections (get out there and vote!). Any impact on MBS pricing is not expected, whether the Senate stays under the thumb of the Democratic party or has new Republican leadership, as President Obama will not play ball with any new leadership and we will simply see more gridlock. The stock market may react to this though. But we have seen day after day after day of big time 100 and 200 point swings in the stock market but MBS have barely budged just a few measly BPS. So, what happens in the stock market stays in the stock market for the time being.
There will be a few “Talking Feds” this week:
11/03 – Chicago President Charles Evans, Dallas President Richard Fisher
11/05 – Richmond President Jeffrey Lacker, Boston President Eric Rosengren, Former Fed Chair Ben Bernanke
This is a huge week with at least one key economic reading each day. There will be lots of jobs data with ADP, Challenger Jobs Cuts, Initial Jobless Claims, Non-Farm Payrolls and the Unemployment Rates. There will also e a slew of manufacturing and service data with ISM Manufacturing, Factory Orders, ISM Services and Construction Spending.
Just like last week’s block-buster Chicago PMI, the October ISM Manufacturing data was much stronger than expected (59.0 vs estimates of 56.2). This certainly shows that the U.S. is not feeling the sting of weakness from Europe in our manufacturing sector.
Construction Spending disappointed (-0.4 vs estimates of +0.7) but August’s reading was improved from -0.8 to -0.5, plus this is September data and little too old to drive MBS pricing at this point.
Of course the bond market will focus the most on Friday’s Non-Farm Payroll report. It will take a reading below 185K for rates to improve, which is not very likely.