What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) gained +28 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move slightly lower from the prior week. We had the best pricing on Friday and the worst pricing on Wednesday.
There were some very solid readings with domestic economic data, but once again it was the central banks that drove the long-bond market.
The picture brightened on the housing front with improvements in the Home Builders Sentiment, Building Permits, and Existing Home Sales. Inflation is not a factor with low readings in both PPI and CPI, lead by lower gas prices. Sentiment for future growth continues to move upward with better than expected readings in the Leading Economic Indicators and The Philly Fed survey.
After trading sideways all week, MBS moved back into positive territory on Friday after two moves by Central Bankers. The People’s Bank of China (PBOC) unexpectedly cut their key interest rate for the first time since 2012. The one-year lending rate was reduced by 0.4 percentage point to 5.6 percent, while the one-year deposit rate was lowered by 0.25 percentage point to 2.75 percent.
European Central Bank (ECB): President Mario Draghi threw the door wide open on Friday for more dramatic action to rescue the euro zone economy, saying “excessively low” inflation had to be raised quickly by whatever means necessary. Draghi said there was now no sign of economic improvement in the months ahead and that the ECB would expand and step up its program to pump more money into the currency bloc if its current measures fell short of lifting inflation.
What’s on the agenda for this week?
No trend reversal in BPS today. Should be nice and boring.
This is a holiday shortened week with the bond market CLOSED on Thanksgiving day and an EARLY CLOSE on Friday.
There are no “Talking Feds” this week but there are some shorter term Treasury auctions:
11/24 2 year note
11/25 5 year note
11/26 7 year note
There will be a hectic couple of trading sessions on Tuesday and Wednesday as ALL the economic data for the entire week is smushed into those two days.
On Wednesday, we get the first revision to the previously released 3rd quarter GDP data. Generally, the market is expecting a revision downward from 3.5% to 3.3%. But if we see a revision above 3.5%…MBS will sell off. The other big report that day is Consumer Confidence which is expected to hit a very high level (96).
Wednesday will have over 15 economic events! Durable Goods will be very key, and Chicago PMI and Consumer Sentiment will be closely watched. These readings will directly impact the final trades before traders go on vacation Wednesday afternoon.
Of course, Central Banks continue to provide the most momentum for long bonds. A news report out of China speculated that their surprise rate cut last week is just a first of many and the ECB has announced a $26B fund to jump start business (somehow they expect to make $300B off of their loans/equity positions which is very unlikely).