What Happened Last Week?
Mortgage backed securities (MBS) gained 65 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
It was the first full week of trading in 2016 and it was dominated by weakness out of China and falling oil prices.
Jobs, Jobs, Jobs
The biggest domestic event of the week was Friday’s big jobs report. The much anticipated NFP and wage data showed that the number of jobs added was impressive, but we just are not seeing a gain in wages. The bottom line is that due to the lack of wage inflation, this report has done little to persuade bond traders that a March rate hike is likely.
Non-Farm Payrolls December 292K vs estimates of 200K. November was revised upward from 211K to 252K. October was revised upward from 271K to 307K. So, overall – very strong job growth over the past three months.
Unemployment Rate 5.0% vs estimates of 5.0%
Labor Force Participation Rate increased from 65.8% to 65.9%
Average Weekly Hours remained stuck at 34.5
Average Hourly Earnings was lighter than expected 0.0% vs est of 2.0%. Many feel that this is too low to justify a rate hike in March
Year over Year Average Hourly Earnings moved upward from 2.3% to 2.5%
Across the Pond
China: This was a very turbulent week for their stock market with circuit breakers being tripped, then removed, then the government stepped in and directly bought stocks, threatened to jail major traders that sold off, and allowed their Yuan (currency) to devalue against our dollar. This caused a lot of money to flow into the waiting arms of the U.S. and found its way into our bonds which was a very large factor in boosting demand and pushed our rates lower.
Oil: Prices fell to 11 year lows last week amid a glut of supply and a perceived slowdown in future demand out of China due to their manufacturing economy slowing down. Saudi Arabia refused to lower their production and Iran is getting ready to come online with their new supply. These are just a few of the factors that have kept steady pressure on oil prices which means that U.S. will not see any price inflation for a long time and that is always bond friendly.
What’s on the Agenda for this Week?
Will the 100 day hold out and be the new short-term support level or will MBS sink back below it.?…that is what this week will determine and the result will either be lower rates trending forward or a slight uptick depending on the answer. It will be oil and China, oil and China all week. But the Fed’s Beige Book (how they look at the economy) along with the bevy of talking Feds this week will give bond traders a better understanding on their bias towards future rate hikes. Retail Sales and Inflationary data (PPI, etc.) will be key as well as foreign central bank action on Thursday. It’s a very robust week for sure.
There are a lot of important domestic economic data such as Retail Sales and a lot of readings on different forms of inflations, a lot of talking Feds (including their Beige Book), Treasury auctions and continued dominance by China and oil in the headlines.
The Talking Fed:
01/11 Atlanta Fed President Dennis Lockhart, Dallas Fed President Rob Kaplan
01/12 Richmond Fed President Jeff Lacker
01/13 Fed Beige Book, Boston Fed President Eric Rosengren, Chicago Fed President Charles Evans
01/14 St. Louis Fed President James Bullard
01/15 New York Fed President William Dudley
Treasury Auctions This Week:
01/12 3 year note
01/13 10 year note
01/14 30 year bond
Across the Pond
China’s stock market tumbled (yet again) this morning and will continue to dominate the headlines along with oil as WTI has hit a fresh 12 year low this morning.
There are also meetings on Thursday of Eurogroup and the Bank of England to watch carefully.
MBS have been flirting with the 100 day moving average all day as there has been no new domestic economic data that can impact pricing, and China and oil continue to provide amazing support for pricing right now.
Jobs, Jobs, Jobs: The December Labor Market Conditions Index was 2.9. The November number of 0.5 was revised significantly upward to 2.7. So, this index based upon 19 labor market indicators is mirroring the strength that we saw in Friday’s Non-Farm Payroll gains.
The Talking Fed: Atlanta Fed President Dennis Lockart spoke at a Rotary Club. He said he remains “mildly optimistic” that strong domestic consumption will help spur U.S. GDP growth of as much as 2.5% this year, enough to push the economy to full employment and eventually boost inflation.
BUT…he felt that international problems such as the slowdown in China and continued low oil prices are now the chief risks to what is an otherwise promising outlook for the U.S. economy.
Black Gold, Texas Tea: Another day, another new 12-year low as oil “tanked” 5.28% at $31.41 per barrel and amid speculation that oil could break below $20 per barrel if China continues to struggle.
Across the Pond
Big Trouble in Little China: The Shanghai composite tumbled 168 points, or 5.29%, to 3,017.99, while the Shenzhen composite plunged 130.61 points, or 6.6%, to close at 1,848. In afternoon trade, Hong Kong’s Hang Seng index closed down 2.7%, slipping below the 20,000 threshold for the first time since June 2013.
So… it’s China and oil…China and oil…that bond traders are focusing on right now.
On Deck for Tomorrow: JOLTS and our 3 year Treasury note auction.