What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) gained +87 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move lower from the prior week, to their lowest levels in history.
It was a full week with all the traders back from vacation, with a new all-time high reached on Tuesday.
One of the biggest stories of the week was falling oil prices as WTI Crude Oil dropped from $52.61 per barrel down to $48.21 per barrel. This longer-term trend of oil prices falling is very anti-inflationary and therefore positive for long-bonds in the short term and helped mortgage rates decline.
The lowest mortgage rates ever were on Tuesday after the weaker than expected ISM Services report was released. This was coupled with the perfect storm of light volume, as much of the global market was on holiday and concerns over a Greek exit from the Eurozone gained momentum.
The two biggest domestic events of the week were the release of the minutes from the last Federal Reserve meeting and Friday’s Non-Farm Payroll report.
FOMC minutes from the last December meeting:
– Could hike rates based upon current core level of 1.4% as long as it appears that inflation is on its way up. This is key as before their stance was that inflation had to hit 2% before they would act…so they are leaving the door open.
– Said rate hikes “unlikely” for the next couple of meetings which puts April as the soonest that they could raise.
– As for the economy, FOMC members saw upside risks, with lower oil prices and labor market improvements providing a lift.
– The officials saw global weakness as the main threat to continued U.S. economic growth. Overall this was right along the lines of what Janet Yellen said at her live press conference and did not have a material impact on rates.
December Non-Farm Payrolls (NFP) came in at 252K vs estimates of 240K. This is better than expected but not by enough to drive pricing by itself. The real movement in pricing was the fact that the November NFP was revised upward from 321K to 353K. The market was concerned that this blockbuster reading in November was an anomaly and would be revised back down below 300K…but it was not a fluke..it held and was revised upward. In all, November and October NFP were revised upward by 51K. This is what drove MBS pricing downward from their weekly highs. The Unemployment Rate dropped from 5.7% to 5.6% which is not a big deal considering the participation rate also dropped which heavily influences this number.
The lone disappointment was a reduction is average hourly earnings which fell -0.2% vs estimates of +0.2%. If it weren’t for this piece of weakness, MBS would have sold off a lot more.
What’s on the agenda for this week?
On an intra-day basis, MBS are stuck right along the 102.50 range and isn’t expected to materially move higher or lower than that today. For the week, there appears to be no opportunity for MBS to climb above last Tuesday’s highs but fantastic pricing is expected with a very limited downside.
Treasury auctions this week:
-1/12 3 year Note
-1/13 10 year Note (reauction)
-1/14 30 year Bond (reauction)
The biggest domestic reports of the week are Wednesday’s Retail Sales and Friday’s CPI report. Last time around, the Retail Sales surprised to the upside and pressured pricing. The market is expecting a flat reading of 0.0% this time around. There will be PPI earlier in the week, but CPI will get more attention as traders want to know how close we are to the 1.4% YOY reading that the last FOMC minutes mentioned the Fed may look at for interest rate hikes.
Across the pond:
ECB: Another ECB Governor has come of out the closet and says that ECB needs to buy government bonds now to thwart deflation. Traders are watching this and sentiment about the future likelihood of this event will impact pricing.
China: As The Shanghaio Daily reports, the Chinese property developer Kaisa Group Holdings failed to repay a US$26 million bond coupon, making it the first Chinese property firm to default on dollar bonds. Weakness in China and concerns over their financial system will continue to the be a driving force in pricing.