What Happened Last Week?
Mortgage backed securities (MBS) lost 37 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
After the prior week’s big run up of +81BPS due to the weaker than expected Non-Farm Payroll report, last week saw MBS leveling off as we clearly hit the upper limits of what traders are willing to pay for our benchmark 30 year fixed MBS.
The market focus was squarely on the Federal Reserve as they released the minutes from their last FOMC meeting. The theme was: The time to tighten is here….BUT it is appropriate to wait at this time.
– Talk about a mixed message!
– To read the official minutes, CLICK HERE.
– They were very focused on being below their target inflation rate of 2%
– They were also very concerned about global weakness and the potential drag on our economy.
– Basically, there was nothing really new nor shocking in the minutes but the stock market certainly rallied on the prospect of zero rates forever. Bonds had a mixed reaction and by the end of the session were lower.
There were several speeches by Federal Reserve members and here is an example of the mixed messages that we are getting from them:
Atlanta Fed President Dennis Lockhart spoke and he left the door open for a potential rate hike in 2015 and said that the international slowdown and the weak jobs report shows there is “a touch more downside risk” to the U.S. economy but he said “The economy remains on a satisfactory track and … I see a (rate) liftoff decision later this year at the October or December FOMC meetings as likely appropriate.”
But Chicago Fed President Charles Evans spoke and he said “While I favor a somewhat later lift off than many of my colleagues, the precise timing for first increase in the federal funds rate is less important to me than the path the funds rate will follow over the entire policy normalization process.” He also said that after “liftoff” he thought it would be appropriate to keep the Fed Funds rate below 1% through 2016.
What’s on the Agenda for this Week?
Just like all last week, MBS are under pressure but also just like last week it is partially mitigated by very strong technical and also fear-based support. In today’s case, it is the stall worth 200 day moving average that is being tested. After briefly trading below it, it has held up so far. If it closes below it then that means “another leg downward” into a lower trading channel for the week but if it closes above it then we will see mostly sideways movement on a relative basis. There aren’t really any major economic events today that can help pricing.
The three biggest events this week are:
1. Retail Sales. The market is expecting a small pick-up of 0.1%. Basically, the stronger this number is, the worse it is for pricing. The weaker this number is, the better it is for pricing.
2. Inflation. Both PPI and CPI are this week and the market will be paying very close attention to any inflationary pressure.
3. Fed’s Beige Book. This report will give a good insight on how the 12 fed districts are doing, which would play into expectations of any Fed action on October 28th.
There are no major Treasury auctions this week but there are several Talking Feds:
10/12 – While the bond market was closed we heard from Dennis Lockhart, Charles Evans and Lael Brainard.
10/13 – St. Louis Fed President James Bullard
10/15 – NY Fed President William Dudley, Cleveland Fed President Loretta Mester
10/16 – The Atlanta Fed’s Business Inflation Expectations report will be released.
Across the Pond
China: Data showed Chinese imports fell 20 percent in September due to weak domestic demand, indicating that growth in the world’s second-largest economy was sputtering. Normally, week economic data out of China is good for global bond prices but MBS are still under pressure this morning.
Market Wrap-up
Overview: There was limited economic data today as MBS tested the heck out of the 200 day moving average and it held nicely driving MBS back into the middle of the channel. Two Fed officials spoke today. One basically says he is not in favor of raising rates this year. The other is in favor of raising rates but don’t think it’s possible given the small amount of time between the September and October Fed meetings as the data trend is the same now as it was then.
Domestic Flavor
Small Business Optimism: In a confirmation of strong levels of job openings in the JOLTS report, small businesses are reporting the most difficulty in finding qualified workers since 2007, pointing to the risk ahead of wage pressures. Boosted by employment, the small business optimism index inched 2 tenths higher in September to a slightly higher-than-expected 96.1. Plans to increase employment are also up, at their best level of the year, while capital outlay plans are also positive. Earnings trends are in the negative column as are expected credit conditions. Overall, this report is moderate though the strength in employment could raise talk of strength for the October employment report.
There were two “Talking Feds” of note today:
St. Louis Fed President James Bullard said that he supported a rate hike and opposed the decision to delay when the Fed met in September, but said, as a practical matter, the economic data since released is unlikely to convince other policymakers to increase rates when the Fed meets in two weeks. “It is very tough for the committee to make a big decision and then change it after only one meeting,” Bullard said. “Roughly speaking the data has not been that different from what would have been expected, and the jobs report was weaker.”
Federal Reserve Governor Daniel Tarullo said the Fed should not hike interest rates this year and should wait for “tangible evidence” that inflation will pick up. “Right now my expectation is, given where I think the economy would go, I wouldn’t expect it would be appropriate to raise rates,”
Across the Pond
China: Data showed Chinese imports fell 20% in September due to weak domestic demand, indicating that growth in the world’s second-largest economy was sputtering. Normally, weak economic data out of China is good for global bond prices but MBS were still under pressure this morning.
Tomorrow will be the biggest economic release of the week with Retail Sales. We also get a very important Fed Beige book. Rounding out the day is PPI and Business Inventories.