Mortgage Backed Securities (MBS) Overview
This was a light day for economic news, with only one mid-level report (Labor Market Conditions Index) which dropped from 4.0 to 2.9.
As expected, the 10 day moving average was once again tested and held nicely. The story today was oil, oil, oil, as WTI Crude dropped to $63.11 which is almost a 5 year low. This major move lower spells no to low inflation for the U.S. AND in the immediate term, slows down economic growth in the U.S. until consumers prove that they are willing to spend their savings at the pump. This has caused long-bonds to spike on low inflation fears.
The stock market is down triple digits on weaker than expected earnings out of key companies like McDonald’s and on downgrades on several oil/gas/energy companies.
Global economic weakness set the stage for strong support for MBS pricing this Monday:
Germany: Industrial Production grew but only at 0.2% which was lighter than the 0.4% forecast.
China: Their Trade Data disappointed, growing at 4.7% in November vs. expectations of a 8.2% jump.
Japan: Their 3rd quarter GDP was revised lower to -1.9% as capital spending declined and personal consumption remained weak and marks that second straight quarter of declines.
Eurozone: ECB policymaker Ewald Nowotny’s warning of a “massive weakening” of the economy followed a rating downgrade in the bloc’s third largest economy Italy, buoying bond markets as investors positioned for a fresh round of central bank stimulus.
Tomorrow, will be the first of three Treasury auctions this week but Wednesday’s 10 year auction will be more important. The Wholesale Inventory report will get the spotlight for the day but the market will be once again ruled by oil and overseas’ events. If oil makes a rebound (as traders buy it off of its lows not seen since 2009), then MBS will give up some of today’s gains.