What Happened Last Week?
Mortgage backed securities (MBS) lost 74 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
Jobs, Jobs, Jobs: Last week was all about the labor picture and the market’s view on its impact on any future Fed action. Overall, the data was very negative for MBS as it was very strong (there is an inverse relationship between strong economic data and rates). As we have been saying for some time, the focus of long bond traders is less on the Non-Farm Payroll (NFP) number and more about the Average Hourly Wages.
Average Hourly Wages were double the market expectations (0.4% vs estimates of 0.2%). But it’s the longer term trend that the Fed looks at and on a year-over-year basis, Average Hourly Wages jumped up to 2.5%. Wage Inflation is a very important metric and while commodity prices will be low for a very long time (oil, etc.) we are seeing a nice increase in wages. This has provided the most weight on pricing and caused mortgage rates to rise to their highest levels since mid-September.
NFP: Much stronger than expected in October with a reading of 271K vs estimates of 180K. September is revised 5,000 lower to 137,000 with August revised 17,000 higher to 153,000 for a net 12,000 gain.
Unemployment Rate: It fell to 5.0% vs expectations for it to remain at 5.1%. And this decrease was not due to a drop in the Participation Rate which actually increased from 65.9% to 66.0%.
What’s on the Agenda for this Week?
This is a holiday shortened week with no live pricing on Wednesday as the bond market is closed for Veteran’s day. And there will be a bond coupon roll over Tuesday morning. Expecting a big rebound from last week? Doesn’t look very promising as MBS are almost in the same trading channel level as September when (at that time) it was perceived that there was a 50/50 chance of a September rate hike and a 100% chance of a rate hike by December. Well, we know how that worked out but it demonstrates the appropriate pricing level for MBS when the odds of a rate hike are greater than 50%.
After two big weeks (2 weeks ago Fed meeting, last week NFP report) that caused MBS to sell off, MBS are looking to find a bottom.
There will be a good dose of inflation related data with Import Prices and PPI. But those reports are unlikely to have much of an impact on pricing.
While there is lots of economic data to digest, the following items (listed in order of importance) have the biggest chance of impacting back end pricing: 1) Retail Sales, 2) Talking Feds, and 3) Treasury auctions.
Friday’s Retail Sales and Consumer Sentiment will have more weight as far as domestic data goes.
11/09 – 3 year note: generally not a factor in pricing
11/10 – 10 year note: middle importance
11/13 – 30 year bond: most important of the week
The Talking Fed
11/09 – Boston Fed President Eric Rosengren
11/10 – Chicago Fed President Charles Evans
11/13 – Fed Chair Janet Yellen, St. Louis Fed President James Bullard, Richmond Fed President Jeffrey Lacker, Charles Evans, New York Fed President William Dudley
11/14 – Cleveland Fed President Loretta Mester
The Financial Stability Board (FSB) says that the most systemically important lenders must have total loss-absorbing capacity equivalent to at least 16% of risk-weighted assets in 2019, rising to 18% in 2022. The shortfall banks face under the 18% measure ranges from 457 billion euros to 1.1 trillion euros ($1.2 trillion), depending on the instruments considered, according to the FSB.
MBS are seeking a bottom as we are still under pressure in the continuing shift among long-bond traders of a higher probability of a December rate hike. Today, there was more positive (Fed generated) labor news, a Talking Fed that had been “dovish” and now sounds “hawkish” which both lead to a crappy 3 year note auction. All are negative for MBS.
Jobs, Jobs, Jobs: The Labor Market Conditions Index was much stronger than expected in October (1.6 vs estimates of 0.6), plus September was revised significantly from 0.0 to a nice 1.3 reading. The labor market conditions index (LMCI) is based on 19 labor market indicators and is prepared by the Fed’s research department. This is yet another log on the fire for strong labor news and a potential rate hike.
Treasury Auction 3 year note: $24B at a high yield of 1.271. The bid to cover ratio of 2.82 is the lowest for this issue since the October 2009 auction. Overall not a very good auction by recent historical standards. We paid 1.271% at this auction to float our debt for 3 years. The last 3 year auction, we only had to pay 0.895%!!
The Talking Fed: Boston Fed President Eric Rosengren spoke today at 12:00EST. He said there has been “real improvement” in the economy of late with the October jobs report delivering “very good news.” What makes this interesting is that he has been a firm “dove” backing policy accommodation. So…the fact that even he is optimistic about the economy and jobs area causes bond traders to shift their probability of a December rate hike one more tick to the right.
Tomorrow will be an important 10 year auction and if it is as weak as today’s 3 year, MBS will be pressured. The day also starts with the FNMA coupon monthly rollover. For economic data will be Business Optimism, Wholesale Inventories, and Import/Export prices.