What Happened Last Week?
Mortgage backed securities (MBS) lost 12 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
This was a holiday-shortened week (closed for Veteran’s Day) with only four trading sessions. Overall, we moved in a very narrow range and found a temporary floor of support that was tested a few times and it held which is a little encouraging after selling off the entire month of November.
There was a mixed bag of economic data but overall the trend remains that we have economic growth and even though it is slow going. The sentiment among long-bond traders has been gradually shifting more towards a higher probability of a Fed rate hike in December.
A good example of this “mixed bag” of economic data are Retail Sales vs. Consumer Sentiment. The Consumer Sentiment reading was very strong but a tame reading where it counts….where they spend their money…Retail Sales.
Retail Sales: The top of the economic pyramid was weaker than expected (0.1% vs estimates of 0.4%) but fundamentally remained solid and still showed growth on a month-over-month basis.. Core sales rose a respectable 0.3% which hits the consensus. There are solid gains including housing-related components of furniture/home furnishings and building materials/garden equipment. Non-store retailers also showed a strong gain as do restaurants.
Year-on-year rates really tell the story, especially a respectable plus 4.1% rate for sales excluding gasoline stations, a component that is down 20.1% and has been badly skewing total sales all year. Total sales are up only 1.7%.
Consumer Sentiment: The preliminary November reading was much stronger than expected (93.1 vs estimates of 91.5). Expectations are especially showing life, up 3.5 points to 85.6 which is the best since June. Strength in expectations points to confidence in the outlook for the jobs market and, to a lesser degree, for the stock market as well. The assessment of current conditions is also higher, at 104.8 for a 2.5 point gain and pointing to strength in the current jobs market. Inflation expectations are moving lower, at least for the one-year outlook which is down a steep 2 tenths to 2.5%. This reading is a reminder of how weak inflation reports are coming in, including today’s data on producer prices. But longer term expectations are stable, unchanged and also at 2.5% for the 5-year outlook.
Both Wholesale and Business Inventories were much stronger than expected in September. This will cause economists and traders alike to upwardly revise their estimates for the first revision to the previously released 3rd quarter GDP data.
What’s on the Agenda for this Week?
On an intra-day basis MBS will trade in a very narrow range; expect a boring trading session. For the week, the new temporary floor of support that held last week should hold for this week which means the downside is very limited. However, if bond traders feel that the FOMC minutes on Wednesday increase the probability of a December rate hike, then we could break below that support level. The bond market does not have a rate hike fully priced in yet. Economic reports this week simply don’t have the scale or gravitas to move out of last week’s channel.
The Fed will remain the central focus among bond traders this week. We actually have a fairly light week for economic data.
The “Talking Fed”
The biggest event of the week is Wednesday’s release of the minutes from the last FOMC meeting. If you recall, their policy statement shifted and many traders viewed it as “opening the door” for a December rate hike. There should be more information coming about their internal discussions on the timing and scope of the first rate hike.
Now, the minutes are from perspectives that existed last month. So investors will be paying even more attention to the bevy of talking feds this week which are more reflective of their perspectives now:
11/17 – Jerome Powell, Daniel Tarullo
11/18 – William Dudley, Rob Kaplan
11/19 – Dennis Lockhart, Stanley Fischer
11/20 – James Bullard
Domestic Flavor
Housing: There are several reports this week on the new housing sector. None will impact pricing but the Home Builder’s Sentiment Index and New Housing Starts/Permits will give a good idea on how well that sector is progressing, as it has not seen nearly the growth that the existing home market has seen.
The two biggest economic (non Fed) releases of the week will be Tuesday’s Consumer Price Index and Industrial Production but neither of these are unlikely to give MBS a “pop” in price as we already know from last week’s PPI report that there is no worries about any inflationary pressure.
There is also a G20 meeting but the headlines will deal with terrorism and not any new trade or economic developments that can influence trades.
Across the Pond
Japan: The world’s third-largest economy has contracted for a second consecutive quarter, marking a technical recession. Growth was expected to decline after it fell a revised 0.7% in the second quarter on weak domestic demand. Japan has been in recession four times since the global financial crisis.
Market Wrap-up
Wow… a monster +200 rally in the stock market! So MBS had to sell off, right? Because the stock market controls the bond market? This is a myth. MBS are up AND stocks are up. They have different buyers with different time horizons for their investment needs. And this is not the world pre-2005 where stocks and bonds are leveraged and one has to sell off for the other to rally. Bond traders get in and out of bonds…into other bonds (corporate, sovereign, junk, etc.).
Overview
A boring trading session was expected and that is how today went. NO major economic news, Talking Feds, auctions….heck Japan’s “official” recession did nothing for pricing.
Domestic Flavor
Empire Manufacturing: Once again, this low-level regional report was dismal. It came in at -10.74 in November which follows a horrible -11.36 in October. Not a factor in pricing as MBS focus on the national ISM data instead.
Tomorrow will be CPI and Industrial Production and Cap Util reports along with a sprinkle of Home Builder’s Sentiment. None are likely to break MBS out of the current channel.