I hope you had a great Valentine’s Day and enjoyed the long weekend!
What happened last week?
Mortgage backed securities (MBS) gained 8 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. But it was a very volatile session that saw another new intra-day high for MBS (lowest rates of 2016) on Thursday followed by a massive -116 BPS sell-off from those highs on Thursday to Friday’s lows which more than erased the lowest rates for the week.
While Fed Chair Janet Yellen’s testimony received a lot of attention from bond traders, it was actually overseas events that provided the most volatility for MBS rates.
Sweden cut their key interest rate further into the red (from -0.35% down to -0.50%) and concern spiked on all European banks on fears that they are undercapitalized to endure the wave of bad loans and weak economic conditions in Europe. Later, in the week some of that fear dissipated as Deutsche Bank announced that they buy back over five billion (both U.S. dollar denominated and Euro denominated in the mix).
Texas Tea, Black Gold: Last week there was a sharp 116BPS swing from Thursday’s highs when Oil was as $26.22 and then a sharp reversal as MBS sold off when Oil marched back towards $30. This provided a tremendous amount of volatility for MBS trades. The best MBS pricing of the week (and year) was when WTI Crude Oil dropped to $26.22. But MBS lost those lofty levels as Oil gradually increased and caused a large pricing worsening on Friday as Oil hit $29.39.
Domestic Flavor
Yellen is Yelling: Our Fed Chair Janet Yellen got grilled by committees in the House on Wednesday and the Senate on Thursday. Key takeaways are that the Fed is now admitting that they are concerned enough about a recession and negative rates (from abroad and the potential here too) that they are building in some scenarios into their worst case scenario models.
Retail Sales: The January Headline reading was double the market expectations (0.2% vs estimates of 0.1%). The core reading (Ex-Autos) also was stronger than expected (0.1% vs estimates of 0.0%). But what got the most attention from bond traders is the Ex-Auto AND Ex-Gas reading which was up a very nice +0.4%.
What’s on the Agenda for this Week?
This week starts off with MBS treading water and trading in a very narrow range that is now capped by the 10 day moving average which had been a great support level for the past couple of weeks. This week will be dominated by oil prices and the key will be to see if more countries join Russia and Saudi Arabia in a production freeze. There will be a lot of talking Feds this week and, along with the minutes from the last the meeting, the overall tone of the Fed towards global weakness, negative rates and inflation will have an impact on our near term trend. But the bottom line is oil needs to head back below $27 for there to be any type of real rally in MBS this week.
Three Things
The three biggest story lines that long bond traders are focusing on this week are: (1) Oil, (2) China back on line and (3) European Banks. Notice that none of the top three items that have the greatest probability of influencing pricing are domestic items.
Oil, Oil, Oil: This week will be more of the same. It starts out with news that Russia and Saudi Arabia have agreed to “freeze” output at current levels. But at current levels we still have over 1 million barrels in new surplus each and every day. So this really doesn’t accomplish anything from the supply side. But it may provide a bottom in Oil prices and more importantly, it may set the stage for more involvement from other countries.
China: Was basically shut down last week in observance of their Chinese New Year. Now they are back online and have already started to release economic data again (trade balance) and their stock markets and currency manipulation are back in play and will be watched very closely.
European Banks: Their profits are down and so are their stocks, and the more that this sector continues to slide, the better it is for MBS pricing. But if there is a rebound in this basket of stocks, then MBS could see some pressure.
Domestic Flavor
The Talking Fed: We have a big plate of “Fed Speak” to digest with the focus on Wednesday’s release of the minutes from the last FOMC Meeting.
- 02/16 – Philly Fed Pres Patrick Harker, Boston Fed Pres Eric Rosengren and Minneapolis Fed Pres Neel Kashkari.
- 02/17 – FOMC Minutes, Atlanta Fed Business Inflation Expectations and St. Lous Fed Pres James Bullard
- 02/18 – S.F Fed Pres John Williams
- 02/19 – Cleveland Fed Pres Loretta Mester
Housing: There will be a couple of lower level reports that don’t have the gravitas to move the needle on pricing but it is important housing news. It starts off with the NAHB Housing Market Index and then follow that up with Housing Starts and Building Permits.
Inflation? Not likely there will be both PPI and CPI this week. Of course, the real play (as far as traders are concerned) regarding inflation is Oil…the longer it stays at or below $30, the further out they are projecting future inflation and therefore future Fed rate hikes.
Market Wrap-up
Overview
The holiday-shortened week started off with a “yawn” as MBS pricing has been doing nothing and has been relegated to trade below the 10 day moving average. Today has been a light day for oil trades, domestic news, etc. There has been nothing to “shock” MBS out of their current range.
Domestic Flavor
The Talking Fed:
- New Philly Fed President Patrick Harker: Said that “It might prove prudent to wait until the inflation data are stronger before we undertake a second rate hike,” and “I am approaching near-term policy a bit more cautiously than I did a few months ago.” Also, “At this point I don’t foresee a rate cut … because it is still an extremely accommodative policy stance,” added Harker, who does not vote on monetary policy until next year.
- Another newbie, Minneapolis Fed President Neel Kashkari, mostly spoke about Congress taking action and proposing new rules to break up the nations largest banks. “Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all.”
- Boston Fed President Eric Rosengren speaks at 7:30EST.
Housing:
The NAHB Home Builders Sentiment Index was a nice 58. Anything above 50 is positive. The February reading was lighter than the projected 60 level but January was revised upward from 60 to 61.
On Deck for Tomorrow:
PPI, Housing Starts and Building Permits, Industrial Production and the minutes from the last FOMC meeting.