What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) lost -23 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move slightly higher from the prior week. There was the best pricing on Monday and the worst pricing on Wednesday.
It was a fairly light week for economic data with a holiday-shortened trading session. Both Wholesale and Business Inventories were slightly better than expected and will help to round out economists’ projections on the first revision to the fantastic 3rd quarter GDP data.
But the two biggest reports of the week were Retail Sales and Consumer Sentiment, which were both better than market expectations. Retail Sales beat estimates (+0.3% vs +0.2%) and Consumer Sentiment rose to its highest levels in seven years, which leads economists and traders to speculate that Retail Sales will be even stronger on the next report. Obviously, cheap oil prices at the pump has a lot to do with consumers’ upbeat outlook.
Overseas, the Eurozone’s growth was stronger than expected and Germany avoided a triple-dip recession which also pressured on long-bond yields as MBS were previously receiving a lot of momentum due to weakness in Europe.
From a technical perspective, MBS climbed back above the 10 day moving average, but the 25 day moving average once again proved that it was king of the hill and kept a lid on any gains.
What’s on the agenda for this week?
There was horrible news out of Japan and weaker than expected Production and Utilization data out of the U.S. Bonds tried to rally and were smacked down to trade back below the 25 day moving average. This tells a lot about the MBS market and when the collapse of Japan is not enough to keep MBS pricing in positive territory….there is no reason to float on an intra-day basis today. The wild card today is ECB President Mario Draghi’s comments that he would support directly purchasing government bonds. The market needs to figure out if this can really happen and could drive pricing later on. Once again, no reason to ever even consider thinking about floating long term. Since 10/15 MBS have already lost -42 BPS.
MBS started the day on a huge upswing on the weekend news that Japan “unexpectedly” fell into a triple-dip recession which sent traders scrambling to dump their dollar-yen positions and buy up American bonds.
This week there is a lot of housing data with the Home Builders Index, Housing Starts, Building Permits, and Existing Home Sales.
This week will also focus on inflation (or rather the lack of) with the Producer Price Index and the Consumer Price Index.
But the focal point of the week will be Wednesday’s release of the minutes from the last FOMC meeting. Traders will be combing through it for any tidbits that could help them guess when the first rate hike will come. However, the Fed has been painfully clear that it is simply data-dependent and the domestic economic data has been trending upward…but not at a blistering pace.
Unlike last week, there are no major Treasury auctions (not that last week’s auctions had any influence on pricing.)
11/17 Powell, Evans
11/18 ECB President Mario Draghi, Fed’s Kocherlakota