What Happened Last Week?
Mortgage backed securities (MBS) gained 12 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
There were a lot of big economic releases that showed mixed results and as a result, MBS moved in a very constrained range for the week.
Retail Sales: Definitely disappointed. The headline September reading fell short of estimates (0.1% vs 0.2%)…not a huge miss. But August was revised lower down from 0.2% to 0.0%. Ex-Autos (-0.3% vs estimates of -0.1%) and August was revised from positive territory, +0.1% down into negative territory -0.1%. But we need to look behind the headline data. Gasoline sales (a big component of the Retail Sales number) fell 3.2% for the month. This report is not all bad. There are plenty of tangible positives in the data, including a third straight solid gain for motor vehicles, at plus 1.7% in September, and a second straight outsized gain of 0.9% for restaurants. Both of these are discretionary categories and point to underlying consumer strength. Clothing stores are also posting strong gains, up 0.9% despite negative price effects from lower import prices.
Jobs, Jobs, Jobs: The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) continues to show an extremely high number of unfilled job openings with 5.370M. This is a report that Yellen has said she watches closely. Initial Weekly Jobless Claims were very low with a reading of 255K vs estimates of 270K. The more closely watched 4-week moving average dropped to 265K. This is a very attractive trend line for jobs data and signals very tight conditions in the job market.
Consumer Sentiment: The October (preliminary) number was a stunner, coming in at 92.1 vs estimates of 89.5. This will be revised by the end of this month but it’s a strong reading and negative for bonds.
Fed’s Beige Book: To read the official report from the Federal Reserve, CLICK HERE.
Overall, U.S. economic activity continued to expand modestly from mid-August through early October, the Fed said in its Beige Book report of anecdotal information on business activity collected from contacts nationwide. “A number of districts cite the strong dollar as restraining manufacturing activity as well as tourism spending,” the report said. In particular, the steel sector remained weak, as the dollar’s appreciation increased import competition, especially from China. The Fed said labor markets tightened in most districts with some reports of labor shortages, particularly for skilled workers. Overall…this report seems to take a step back from prior reports that showed a rosier picture and supports the Fed’s concerns over tightening too soon.
What’s on the Agenda for this Week?
For the week, expect MBS to continue to be traded at very elevated levels as there is simply zero domestic economic news that can cause MBS to break below the current channel, which means they will be once again stuck in a narrow range with very small gains and very small losses on an intra-day basis. The ECB is unlikely to announce any new expansion to their QE program but it is still on the radar and in the absence of any other big drivers, this could have a skewed impact on pricing Thursday.
There is very little domestic data that has the gravitas to move the needle on pricing this week. There are no major Treasury auctions and the Federal Reserve starts its blackout period (prior to next week’s Fed decision) so there won’t be a lot of Talking Feds this week either.
Three Things to Watch this Week (in Order of Importance)
1. The ECB. Traders are looking for any indications as to if, how and when the European Central Bank’s QE program may be expanded on Thursday.
2. Global Growth. Now that China’s GDP is out of the way, we will be paying close attention to other regional bell-weathers.
3. Housing Data. There will be a very large dose of housing related data this week, with Home Builder Sentiment, Housing Starts and Building Permits and the biggie – Existing Home Sales.
Across the Pond
China: The world’s second-largest economy expanded by 6.9% in the July-September quarter, slowing from a 7% increase in the previous quarter. The figure was better than market expectations for 6.8% but still at its slowest pace since the global financial crisis. Now a stronger than expected GDP reading is generally negative for MBS pricing; however, there is a great deal of skepticism about the validity of this reading among international traders.
Market Wrap-up
Overview
It has been a nice and calm (boring) start to the week which is very light on economic data.
The long bond market had little to no reaction to the stronger than expected Chinese GDP “data” and our only economic release was a simple survey that has very little weight in the marketplace. As expected, we are trapped in the exact same trading channel as Friday (and all of last week) as we are in a holding pattern until Thursday’s European Central Bank meeting and next week’s FOMC meeting.
Domestic Flavor
Housing: The NAHB Sentiment Index jumped to its highest level since 2005 hitting 64 vs estimates of 62. Not a major factor in pricing but it was the only piece of domestic economic news today.
The Talking Fed: Not so much. Richmond Fed President Jeffrey Lacker was supposed to speak today but had to cancel due to illness. And starting tomorrow we enter the “blackout” period where Fed members cannot speak a week before the FOMC meeting begins.
On deck for tomorrow: Housing Starts and Building Permits.