What Happened Last Week?
Mortgage backed securities (MBS) lost 25 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
It was the first full week after the FOMC’s decision to not raise rates on 09/17 and the long bond market (which determines mortgage rates) was trapped in a very tight range with very strong overhead technical resistance that squashed every attempt by MBS to make any gains.
The biggest piece of economic data that was released was the 2nd quarter GDP. This was the third time that the number was released and it was once again revised upward. This time it was ramped up from 3.7% up to 3.9% which means the 2nd quarter grew at a much hotter pace than originally thought. Consumer Sentiment for September was also revised upward from 85.7 to 87.2. New Home Sales were also much better than expected with a reading of 552K.
We also got a much different perspective from a few key officials from the Federal Reserve than the prior week’s policy statement. Federal Reserve Chair Janet Yellen spoke Thursday after the financial markets were closed. Friday Morning there was an immediate sell-off of more than -25BPS right out of the gate as bond traders focused on Yellen placing herself squarely in the camp of those Federal Open Market Committee officials who favor raising rates in 2015. “Most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year.”
James Bullard:, the St. Louis Fed President, said that the FOMC continues to expect “normalization” (term for raising rates) to commence shortly. Once normalization (rate tightening cycle) begins, the Fed will still be extremely accommodative through the medium term.
Esther George:, the Kansas City Fed President, said she believes the Fed should raise interest rates soon so that it will “have the luxury” of being able keep rate hikes gradual.
What’s on the Agenda for this Week?
We could see some very small gains (+5 to +15BPS) today over Friday’s close but certainly not worth the risk to get those gains. It will take a negative Average Hourly Wages report on Friday for MBS to break above this channel. And given the recent economic and jobs related data, it is very difficult to see that happening.
We end the 3rd quarter this week and start a new month and the 4th quarter. October will see yet another Fed meeting. With even Janet Yellen saying she is in favor of raising rates this year, the big question is: Is there enough time and new data from the last Fed meeting for the Fed to act this month? How traders and investors answer that question will determine the direction of pricing this week.
Domestic Flavor
Jobs, Jobs, Jobs: There is a ton of jobs related data this week culminating in Friday’s big Non-Farm Payrolls release. The market will be paying very close attention to Average Hourly Wages. The higher this number is, the worse it is for rates. Leading up to Friday’s release will be ADP Private Payrolls, Challenger Job Cuts, Weekly Jobless Claims and the employment component of the ISM Manufacturing Index.
The Talking Fed
09/28
– NY Fed President William Dudley
– Chicago Fed President Charles Evans
– San Francisco Fed President John Williams
09/30
– Fed Chair Janet Yellen
– Fed Reserve Gov Lael Brainard
10/01
– San Francisco Fed President John Williams
10/02
– Boston Fed President Eric Rosengren
– Minneapolis Fed Pres Narayanna Kocherlakota
– Cleveland Fed Pres Loretta Mester
– Fed Vice Chair Stanley Fischer
– St. Louis Fed President James Bullard
Debt Ceiling
It is clear that we are in for a drawn out and ugly debate over raising our debt ceiling with a very real possibility of a temporary government shutdown. The risk of this happening and the resulting pressure on our macro economy will provide great support for MBS this week.
Market Wrap-up
Domestic Flavor
Personal Outlays:
– Personal Income came in at 0.3% vs estimates of 0.4%, but July was revised upward to 0.5%.
– Personal Spending was 0.4% vs estimates of 0.3% and July was revised upward as well. Overall, this report was just a tad better than expectations.
Core PCE: On a year-over-year basis was 1.3% vs estimates of 1.2%, a small increase but still a far cry from the Fed’s 2% inflation threshold. MBS move just a few ticks lower on this news.
Pending Home Sales: August was a little lighter than expected with a month-over-month shrinkage of -1.4% vs estimates of +0.5%. But this marks 12 straight months of year-over-year gains and the issue primarily is a shortage of available inventory. MBS didn’t have a major reaction to this.
The Talking Fed
There were conflicting views today as Evans was clearly “dovish” and wanted to wait longer to raise rates while Dudley was more “hawkish” and looked for a rate hike this year.
Charles Evans: The Chicago Fed President contended normalizing (raising rates) policy too early brings risks amid pressure on inflation from low energy prices and “subdued” wage growth. The Fed would need to normalize gradually after the first hike to avoid shaking markets further.
William Dudley: The New York Fed President said that the Fed remains on track for a likely rate hike this year and could reach its inflation target next year, faster than many other policymakers anticipate. Dudley said the first hike could come as soon as October as policymakers take stock of an improving economy.
Tomorrow will be reports on Consumer Confidence and the Case-Shiller Home Price Index.