What Happened Last Week?
Mortgage backed securities (MBS) gained 27 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve from the prior week. 30 year fixed rates fell to their lowest levels of 2016 so far.
It was a choppy week with lots of volatility, with a net difference of 82 basis points between the best and worst pricing of the week.
While Friday’s jobs data pressured MBS pricing (higher rates) on an intra-day basis, the overall trend for the week was upward momentum on MBS trades (lower rates) due to lower oil prices and weaker ISM data. This has the bond community hedging towards very low risk and very low inflation for most of 2016 which means very low rates.
Jobs, Jobs, Jobs
Tale of the tape:
- Non-Farm Payrolls – January 151K vs estimates of 190K
- Non-Farm Payrolls – December – revised from 292K down to 262K
- Non-Farm Payrolls – November – revised from 252K up to 280K
- Non-Farm Payrolls – rolling 3 month average 231K
- Unemployment Rate – 4.9% vs estimates of 5.0%
- Average Hourly Earnings – 0.5% vs estimates of 0.3%
- Average Weekly Hours Worked – 34.6 vs estimates of 34.5
- Labor force Participation Rate: Increased from 62.6% to 62.7%
Ok, now that you have all the data laid out for you…what does it mean and how are long-bond traders viewing it? The answer is that they view this as a very solid report that confirms that the labor market slack is tightening but that this will do little to nothing to change the Fed’s trajectory of rate hikes (if any) this year.
The net revisions to December and November were basically a wash and this reading of 152K will be revised as well. More importantly, the trend line is well above 200K.
The big key is Average Hourly Wages which jumped up 0.5% (the Unit Labor Costs on Thursday jumped 4.5%). This has had the most impact on rates as it is inflationary and also shows economic strength…two things that bonds don’t like.
The Unemployment Rate dropped below 5.0% for the first time since May 2008 and what a long strange trip it has been since then. Lately the Unemployment rate (particularly in early to mid 2015) was dropping mostly due to a drop in the Participation Rate (which basically means if you don’t have a job and are not looking for work…then you are not counted as Unemployed). But in this particular case, the Participation rate actually increased AND the Unemployment Rate fell…that is encouraging.
What’s on the Agenda for This Week?
The powerful combination of lower oil prices and a death spiral for European banks has money flowing into U.S. Bonds and that is giving us new propellant to lift MBS prices to their best levels of the year. We will continue to see great pricing this week as our economic news can do little to change longer range forecasts of little to no inflation. The key will be if oil reverses course and trends closer to 33 or 34 (and we have certainly seen that plenty of times over the past couple of weeks). Barring that, it will take a very “hawkish” tone from Yellen on Wednesday for rates to reverse. And with current foreign headwinds (China, Japan and EU) it is difficult to see how she could be hawkish. So, rates will continue to be great this week. Remember, though, that MBS cannot and will not always go up. At some point they will have to recalibrate.
Three Things This Week
The three things that have the greatest potential to directly influence MBS pricing are: (1) Oil, (2) Janet Yellen and (3) Retail Sales.
(1) Oil: Here we go again. MBS have “popped” right out of the gate by as much as +32BPS in early trading today as WTI dropped to $29.64. Oil under $30 is very good for MBS pricing, while Oil over $32 starts to strip off some of the premium pricing.
(2) Yellen is Yelling: Our Fed Chief will testify before the House Financial Services Committee in Washington for her semi-annual monetary report on Wednesday and then again before the Senate on Thursday.
(3) Retail Sales: Easily the most important piece of domestic data for the week but it won’t hit until Friday. We are looking to see if these uber low gas prices are causing consumers to open up their wallet. So far, they have not.
Treasury Auctions This Week
There is a big supply with the most important one of the week hitting on Thursday with our 30 year bond.
- 02/09 – 3 year note
- 02/10 – 10 year note
- 02/11 – 30 year bond
The Talking Fed
Besides Yellen twice this week, we will also hear from:
- 02/10 S.F. Fed President John Williams.
- 02/12 Dallas Fed President Rob Kaplan.
This was a very light day for economic data but MBS pricing benefitted from a new wave of fear coupled with falling WTI Oil prices and a stock market that has sold off yet again. Stocks sold off and bonds climbed across the board on renewed concern over our domestic growth and a heightened concern over the European banking system. Oil tanked as hopes rose then sank on the latest attempt to get discussions going on stemming supply.
Labor Market Index: The January reading was very light at 0.4. December was revised from 2.9 down to 2.3. THE LMCI is compilation of 19 labor market indicators that are already out in the market place. Not a factor in pricing today.
Texas Tea, Black Gold: WTI “tanked” today and hit levels not seen since January 21. This was due to Saudi Arabia and Venezuelan oil ministers coming out of their meeting unable to get a dialog going between OPEC and non-OPEC suppliers regarding curbing supply.
On Deck for Tomorrow: Wholesale Inventories, JOLTS, and our 3 year Treasury note auction.
Across the Pond
Bollywood! India’s GDP shot up 7.3% last quarter which was a nice gain over last year’s reading of 6.6% and much stronger than China’s 6.8% GDP. India is now one of the world’s fastest growing economies and Asia’s third largest (China, Japan).