What Happened Last Week?
Mortgage backed securities (MBS) lost 4 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
It was a holiday shortened week and trading sessions were dominated by wild swings in oil prices. This is a more recent phenomenon as oil prices historically don’t have very much impact on long term bond prices. But in this case, it represents low inflation and many believe will cause our own Fed to wait much longer before they raise rates again. MBS moved higher as oil prices dropped and moved lower as oil prices increased.
There was an important European Central Bank meeting. They left their key interest rate alone but their President Mario Draghi made sure that the markets knew that the ECB would be revaluating their current bias and will do anything to help to start inflation and growth back up. Many believe he is telegraphing additional QE in March.
Inflation? Well, we do have one metric that is above 2.00% and that is the YOY (year over year) Core CPI (2.1%). This is supposed to be one of the key measures (along with core PCE) that the Fed uses as an inflation gauge. However, it obviously doesn’t include energy costs which are in the toilet right now. The headline MOM (month over month) CPI reading was lower than expected (-0.1% vs estimates of 0.0%) and the Core MOM reading was 0.1% vs estimates of 0.2%. All-in-all this report was basically what the market expected and will do nothing to change the Fed’s mind for this week’s meeting.
What’s on the Agenda for this Week?
This is a very big week for economic data and events with the FOMC meeting and GDP getting the spotlight. MBS are treading water with some very small gains as oil has moved off its highs on Friday but is still above $31. It will take a drop back below $30 for MBS to make a run at our upper resistance. For the rest of the week, it really depends on the Fed. Will they “walk back” their bias towards 4 rate hikes this year? Will they discuss easing? This first meeting of the year could have a lot of impact on pricing for the next couple of weeks. But barring any real surprises, MBS are likely to continue to trade in the same channel as last week.
Top Events for this Week
In order of importance: (1) Federal Reserve, (2) Oil Prices, (3). GDP, (4) Manufacturing Data.
The Talking Fed: We get the first FOMC (Federal Open Market Committee) meeting of the year. While it is widely expected that they will do nothing, we are really looking for a change in their bias towards 4 rate hikes this year (which they have made clear at their last meeting was their current trajectory). Most of the Federal Reserve presidents have spoken about concern over China and oil pricing as potentially impacting the Fed’s path. MBS pricing will have a very direct reaction to their commentary contained in their policy statement.
GDP: We get our first look at the 4th quarter GDP. The market is expecting a very mild reading of only 0.9%. MBS pricing is pressured when GDP is over 2.00%. So, the higher this number is, the worse it is for rates and vice versa.
Manufacturing Data: We get a glut this week with Chicago PMI, Durable Goods, GDP, Richmond Fed and more. The manufacturing sector has been under pressure as of late and the Servicing Sector so far has taken up the slack but this week’s data is very important in gauging the likelihood for a recession this year.
Treasury Auctions This Week:
01/26 2 year note
01/27 5 year note
01/28 7 year note
Market Wrap-up
Overview: MBS have had a fairly quiet day.
Texas Tea, Black Gold: MBS have been helped today by WTI dropping below $31 but are still above $30 which explains why they have been trading in such a tight range for the day.
Domestic Flavor
Dallas Fed: This was a dismal report with results that we haven’t seen since the last recession. MBS had no reaction to this but it has traders’ attention. Unlike other regional manufacturing reports like the Empire (NY) State Index, Texas actually does mean something to our economy and as its own country would be one of the top global economic producers. The production index fell from 12.7 in December down to -10.2 and the General Activity Index fell from -21.6 down to -34.6 which is awful. But of course, this is the story of oil.
On Deck For Tomorrow: Case-Shiller Home Price Index, Consumer Confidence, Richmond Fed and a 2 year note auction.