What Happened Last Week?
Mortgage backed securities (MBS) lost 36 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week. For the entire month of October, MBS sold off -32 basis points which led to mortgage rates being higher at the end of the month.
This was a very big week for economic data and Central Bank action. The biggest event of the week was the Federal Reserve policy statement on Wednesday. Mortgage rates increased on Wednesday and Thursday as a result of the market interpreting the statement as opening the door for a potential rate hike in December.
As expected, the Federal Reserve Open Market Committee left their key interest rate alone. But there were some changes between this statement and the September statement that long bond traders are focusing on. Overall, they said the economy is growing at a “moderate” pace and expressed concerns over a labor market that is still growing but not at the same pace that it was. They also reminded everyone that we are way below their 2% inflation threshold but it assessed the progress towards “its objectives of maximum employment and 2% inflation.”
But that being said, the biggest reason for not raising rates in the September meeting (supposedly) was concern over global weakness. Here is where things got interesting: this time around they removed the entire section about concerns over global turmoil. The market is inferring that this means that they overstated that point in September and it is less of a concern at this point.
And the sentence that is getting the most attention: “In determining whether it will be appropriate to raise the target range at its next meeting,” This is very specific and shows that December is on the table as previously they skirted the issue by saying things like “in determining how long whether it will be appropriate to raise the target range at its next meeting.” See the difference?
What’s on the Agenda for this Week?
Pricing is in a lower strata than October and will be trapped in that new range until Friday’s Non-Farm Payroll data. It will take a very weak (sub 150K) reading for this month and a very small revision to the prior reading (142K) for MBS to break out and get back to the channel that we enjoyed through most of October. For today, on an intra-day basis only, MBS are treading water and it will be very difficult to break into positive territory. Last week’s sell-off was justified and not a fluke, therefore, there is no “ricochet” this week unless the labor data is dismal..
This is another huge week for economic data with the focus on Friday’s Jobs data.
There are plenty of “Talking Feds” this week:
11/04
Fed Gov Lael Brainard
Philly Fed Pres Patrick Harker
Fed Chair Janet Yellen
New York Fed Pres William Dudley
Fed Vice Chair Stanley Fishcer
11/05
Chicago Fed Pres Charles Evans
Fed Gov Daniel Trullo
Atlanta Fed Pres Dennis Lockhart
11/06
St. Louis Fed Pres James Bullard
Jobs, Jobs, Jobs:
After October’s weaker than expected jobs data, this week’s data will be viewed as being very key in influencing the Fed’s decision on when to raise rates. What is perplexing for analysts is that the weekly jobless claims data has been trending below 260K (4 week moving average) which is a 42 year low, yet we are not seeing that strength show up in wage inflation. The Non-Farm payroll data was a huge disappointment last time around with a reading of only 142K. But that number will be revised on Friday (and one more time after that) and that revision may actually get more attention than the current reading. Of course, Average Hourly Wages will get the most attention by long bond traders.
Manufacturing
We get a big plate of data to digest with ISM, Factory Orders, Productivity, and Auto Sales. We also get ISM non-manufacturing which actually is more important as it accounts for 2/3 of our economic activity.
Across the Pond
The week starts with a mixed bag of manufacturing data. We see real strength out of Great Britain with PMI much stronger than expected (55.5 vs estimates of 51.3), and the European Union also surprised to the upside (52.3 vs estimates of 52.0). But the “fly in the ointment” is China as their PMI reading for October hit 49.8 vs estimates of 50.0 and is contractionary and causing many to question their growth prospects for Q4.
Market Wrap-up
Overview
MBS have traded in a very narrow intra-day range. Upper resistance was tested in the afternoon but it held nicely which forced MBS back into the red.
Domestic Flavor
ISM Manufacturing: Friday’s Chicago PMI reading was very strong. The national ISM reading also showed economic expansion although at nowhere near the pace that the Chicago PMI had as it was barely in the black hitting 50.1 vs estimates of 50.0. Still, anything above 50 is good. New orders are showing some life, up nearly 2 points to a 52.9 reading that is safely above breakeven 50. Production is also at 52.9. But other readings are not as favorable. Backlog orders remain in deep contraction at 42.5 while employment, for the first time in six months, is also in contraction, down nearly 3 points to 47.6. Exports have been the difference this year for the factory sector and new export orders in this report, at 47.5, remain below 50 for the fifth straight month. Prices, at 39.0, extended their long run of contraction. Unlike the regional Fed reports, this report is not pointing to contraction for the factory sector, only to no change from what were already limited levels.
Construction Spending: Looks solid, up a better-than-expected 0.6 % in September with gains led by housing components. Residential spending extended six months of strong gains with a 1.9% increase for a year-on-year gain of 17.1% which is 3 percentage points better than the rate for total construction, at 14.1%. New multi-family units continue to lead the residential component, up 4.9% for a 26.7% year-on-year gain, while new single-family homes rose 1.3% for a more than respectable year-on-year gain of 12.7%.
Kick the Can: Quick…what do you do when your college age kid spends 3K per month on credit cards when they only make $500 per month delivering pizzas? Why you up their credit limit on your credit cards so that they can spend 5K per month. What did you think you should do…curb spending…why that is just silly. President Obama signed the new 2 year “budget” and debt ceiling increase into law today. He is a good parent.
On deck for tomorrow: Factory Orders and Total Vehicle Sales.