What Happened Last Week?
Mortgage backed securities (MBS) gained 19 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
+19 BPS over a week-long period is actually a small aggregate movement in pricing; however, it was a very choppy week with large pricing swings that moved in lock-step with the volatile oil market.
It was all oil, all the time last week as the long bond market effectively ignored U.S. domestic news. The lower oil prices, along with concern over China, have caused a shift in sentiment among traders as to when (and now…the word IF is gaining traction) this year as the lower prices effectively remove any threat of inflation.
Domestic Flavor
Following were the top economic stories last week. Normally, these would have a larger impact on pricing and rates but these were “steam rolled” by movements in oil pricing.
Retail Sales: Are the lower prices at the pump translating into increased consumer spending? NO. The Headline Retail Sales number for December hit -0.1% vs estimates of 0.0%. This would have come in at +0.1% but November was revised upward from 0.2% to 0.4%, so we are comparing December to a much stronger November than originally reported. Ex Autos, it was a larger miss coming in at -0.1% vs estimates of 0.2%, plus November was revised lower from 0.4% down to 0.3%. This will bring down estimates for 4th quarter GDP , whichis favorable for back end pricing.
Inflation? Not here. But then again we already knew that. The Producer Price Index (PPI) MOM (month over month) data hit -0.2% which matched expectations. The Core PPI MOM was 0.1% vs estimates of 0.1%. The number that gets the most attention is the YOY (year over year) Core PPI which dropped from 0.5% in November down to 0.3% in December. Overall, this is positive for pricing.
What’s on the Agenda for this Week?
IT’S ALL ABOUT OIL and with pricing below $30 to start the week, there will be excellent support for pricing. But can it gain even more? That is tough. We would need to see oil close below $28 (it’s possible) AND a very dovish ECB statement on Thursday (it’s also possible) but that is a risk you must weigh for yourself. Last Friday’s close could very well be some of the best pricing of 2016 even though we won’t see a large sell-off….playing at the top is always risky.
This is a holiday-shortened week (the bond market was closed Monday) and a fairly light economic schedule void of any major Treasury auctions or Talking Feds.
Three Things
The three things to watch as they will be the driving forces in pricing this week: (1) Oil, (2) China, (3) ECB Meeting. Notice all three events are outside the U.S.
Texas Tea, Black Gold: The week starts with oil once again under pressure as WTI crude oil is down 0.48%, as lower demand (China), and a glut of new supply ready to hit the markets (Iran) is driving pricing lower.
Domestic Flavor:
This is a very light week for economic data.
Housing: There will be a good dose of housing data which should help get a good read on the health of our industry. It starts off with Home Builder’s Sentiment and then get the Housing Starts and Building Permits data. But new construction is too small a piece of the housing pie to impact things on a macroeconomic scale. So, Existing Home Sales on Friday will get the most attention from traders.
Inflation? Well, last week’s PPI data (the front end of the equation) showed none and this week’s CPI (the back end of the equation) won’t show any either.
The Talking Fed: We are entering the “black out” period this week as they put the clamps down on any speeches leading up to next week’s Fed meeting.
Across the Pond:
China: Their GDP data hit 6.9% which magically matched market expectations of 6.9%. This is a drop from 2014’s reading of 7.3%. Both steel and electrical power production fell in 2015 for the first time in decades. While the headline reading was designed/crafted to calm the markets, it is clear that traders simply aren’t buying it.
Market Wrap-up
Overview: After an initial (and brief) sell off, MBS rebalanced and traded in a very narrow range all day. There were no major domestic economic data today and the primary driver of back end pricing, oil, stayed under $30 all day. The stock market shot up and stayed up for much of the day on the Chinese GDP data but MBS didn’t buy into that.
Oil has not broken below $28 which is why MBS have not had the extra added momentum towards better pricing.
Domestic Flavor
Home Builders Sentiment: The January Home Builders Index was strong with a reading of 60 which was a tick lower than December. Still anything above 50 is positive. Not a factor in pricing but it was the only release today.
On deck for tomorrow: Housing Starts, Building Permits and CPI.
Across the Pond:
China: Their GDP data hit 6.9% which magically matched market expectations of 6.9%. This is a drop from 2014’s reading of 7.3%. Both steel and electrical power production fell in 2015 for the first time in decades. While the headline reading was designed/crafted to calm the markets, it is clear that traders simply aren’t buying it.