What Happened Last Week?
Mortgage backed securities (MBS) lost 24 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
It was a holiday-shortened week that really only saw two trading sessions with any meaningful economic data.
Jobs, Jobs, Jobs
There were a couple of reports that put the labor market in a positive light:
Initial Jobless Claims fell once again and neared a 42-year low as labor market conditions continue to tighten.
Personal Income rose more than expected and continued an eight-month trend of solid wage gains. The Consumer Sentiment report was stronger than expected and one of the reasons was an increase in favorable expectations of the job market. So, overall it was a good week for the labor sector.
Domestic Reports
Durable Goods Orders were much stronger than expected due to a nice surge in automobile orders, and the 3rd quarter GDP (3rd release) was a tick better than expected due mainly to inventory levels.
Inflation? Not here. The headline PCE reading had a net monthly change of 0.0% and the Core PCE was 0.1%. But the reading that the Fed pays the most attention to is the YOY (year over year) Core PCE which remained at 1.3% which is well below their target rate of 2.0%.
So, basically it was a week of positive economic data while seeing no threat of inflation and that is a welcome combination.
What’s on the Agenda for this Week?
MBS have been drifting in a very narrow channel and are unlikely to make any real move (up or down) today. The only thing going on today is the 2 year Treasury note auction. This is generally too short a term to impact long bonds but it’s the only game in town right now. Do not expect that to change until next Monday when all the traders are back at full strength.
This is another holiday-shortened week with the bond market closing early on Thursday and reopening on Monday.
This is also a very light week for economic data and we get our last dose of Treasury auctions of the year.
Treasury Auctions this Week
12/28 2 year note
12/29 5 year note
12/30 7 year note
Three Things
Here are the three items that have the highest potential of impacting pricing this week:
(1) Chicago PMI will this break back above 50? The higher this reading is, the worse it is for pricing.
(2) Consumer Confidence is expected to rise; it will take a much weaker than expected reading for MBS to see any improvement.
(3) 7 Year Treasury auction. Now that we have officially entered a rate tightening cycle…how will dealers/investors price the risk of future rate hikes?