What Happened Last Week?
Mortgage backed securities (MBS) gained just 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
This was a holiday-shortened week with a glut of economic data crammed into just a few trading sessions. But when the smoke cleared, the totality of the economic data did nothing to change the bias of long bond traders towards a December rate hike. That is why rates moved sideways.
GDP: As expected, the 3rd quarter GDP was revised upward but it was a mixed bag. Third quarter GDP was revised to 2.1% (vs estimates of 2.0%), up 6 tenths from the initial estimate but showing less strength by the consumer with final sales now at plus 2.7 from plus 3.0 percent. Higher inventories were a big factor in the upward revision.
Housing – The Case-Shiller Home Price Index was a tad stronger than expected with a reading of 5.5% vs estimates of 5.0%. Not really a factor in rates, the Existing Home Sales report confirmed 44 straight months of YOY median price gains. The FHFA Home Price Index showed a very nice spike of 0.8% which was higher than the market expectations of 0.5%. On a YOY basis, it was up a nice and respectable 6.1%. New Home Sales had a healthy increase from September (+10.7%) but it is too small of a niche to impact the bond market.
Durable Goods Orders: No matter how you slice it, this was a strong report. The headline data was twice as strong as expected (3.0% vs estimates of 1.5%), plus September was revised upward significantly (-1.2% to -0.8%). The Ex-Transportation reading was also better than expected (0.5% vs estimates of 0.3%) and also saw a positive revision to September (-0.4% to -0.1%). New orders for machinery jumped 1.6% with computer orders up 5.5% and communications equipment up 1.8%. These gains speak to a rebound in expectations among businesses which perhaps are now looking for strength in the new year. Commercial aircraft orders surged more than 200%, which is an anomaly. In a sign of weakness out transportation, orders for motor vehicles fell 2.9% in the month. But this decline is probably not the beginning of a trend given still very strong vehicle sales. Overall this report was negative for rates.
State of the Consumer: The University of Michigan’s Consumer Sentiment Index for November was revised lower from the preliminary release of 93.0 down to 91.3 which was weaker than expected. Consumer Confidence was another mixed bag. October was revised upward (from 97.6 to 99.1) which is pretty strong. But the November Headline reading was much lower than market expectations (90.4 vs estimates of 99.5). This type of miss is normally positive for pricing. However, it appears most of the miss was due to a big pull back in confidence over jobs. Yes…this is counter to what you might think but consumers are saying there are fewer jobs available and it worries them. However, the flip side is that it jives with our very low unemployment rate and is actually strength in the labor market.
What’s on the Agenda for this Week?
MBS are under pressure as traders take their “parked” money out of long bonds and put it back to work in the market, effectively wiping out all of last week’s small 16 BPS gains. MBS have been stuck in the same channel for 8 straight trading sessions. Today, expect the same but instead of closing at the top of the channel (like on Friday), at the bottom of the channel today. Look for this see-saw pattern to continue until long bond traders either (1) put more weight on the probability of a rate hike next week which would cause a break below the channel, or (2) put less weight on a rate hike in December which could pop MBS above the current channel. The economic data on an intra-day basis can only bounce MBS around this channel.
This is a huge week for economic data and by Friday, long bond traders will firm up their bets on a December rate hike.
There are no Treasury auctions this week. Last week’s 2, 5 and 7 were just O.K. and were not strong enough to impact pricing.
Events that Have the Biggest Potential to Move Pricing this Week
(1) Non-Farm Payroll Report: While most will look at the NFP number, really it won’t matter. As long as it is over 150K, the trend looks good. It will be Average Hourly Wages that gets the most attention….the higher the number, the worse it will be for pricing.
(2) Draghi and Crew: The European Central Bank will release their latest and greatest policy statement on Thursday. ECB President Draghi has said publicly that they will “do whatever it takes” and has hinted several times of some new form of QE.
(3) ISM: The market will largely ignore the regional Chicago PMI data and focus on the national ISM Manufacturing Index. But more important is the ISM Non-Manufacturing report which accounts for 2/3 of our economic activity.
(4) The Fed: Their Beige Book which will give a good read into the 12 Fed districts. Also, Janet Yellen will speak twice this week and could have a big impact on pricing.
This morning’s weaker than expected economic data is historically very positive for MBS but they really haven’t gotten any traction. And today’s data did not shift any bias.
Manufacturing: The November Chicago PMI was a big miss (48.7 vs estimates of 54.0). New orders are down sharply and are back in contraction while backlog orders are in a 10th month of contraction. Production soared nearly 20 points in October but reversed most of the gain in November. Despite November’s weakness, employment is up slightly. Prices paid is in contraction for a fourth straight month.
Housing: October’s Pending Home Sales Index was lighter than expected (0.2% vs estimates of 1.0%) but it was an increase and September was revised upward from -2.3% to -1.6% which is positive. The bottom line here is that the overall market is very constricted by tight inventory.
On Deck for Tomorrow: An important ISM Manufacturing report and a less important Construction Spending release.
Across the Pond
IMF and China: The International Monetary Fund admitted China’s yuan into its benchmark currency basket in a victory for Beijing’s campaign for recognition as a global economic power. The IMF’s biggest funder? Why that’s you…the U.S. Tax Payer. This did not have a real impact on our pricing, but it is another step in shifting the weight away from a dollar dominated world. And that is not good.