What happened last week?
Mortgage backed securities (MBS) gained 18 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 (President’s Day) and MBS moved in a fairly narrow range as Oil was relatively stable.
Texas Tea, Black Gold
The week started 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 has (so far) provided a bottom in Oil prices and more importantly, it may set the stage for more involvement from other countries. This has kept oil in fairly narrow range last week compared to some of the huge swings that we have seen recently. And that was the number one factor in MBS pricing and rates last week.
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. Housing Starts were a tad lighter than expectations (1.099M vs estimates of 1.171M). The more closely watched SFR segment was down 3.8% to an annualized rate of 731K. Building Permits were a smidge better than expected (1.202M vs estimates of 1.200M). SFR permits rose 1.6% to 720K.
The Talking Fed
The minutes from the last FOMC meeting were issued. You can read here.
The minutes made it clear that several of the voting members are very concerned about oil prices and a global slowdown but agree (as of January) that it is still too early to determine if they will be prolonged enough to impact our economy on more than a short term basis. Several discussed the possibility of oil stabilizing and moving back towards higher levels later in the year. Overall, they expected other central banks to continue to tighten.
Basically, MBS had little reaction to this release. The reason why is that we have heard from Janet Yellen this month (twice) and she pretty much already addressed these concerns while testifying before Congressional committees. We have also heard from numerous other “talking feds” that have spewed the same concerns that are the minutes.
What’s on the agenda for this week?
MBS will be trading in a very narrow range all week until Thursday and Friday’s domestic economic data. If Oil remains fairly stable then there is zero upside for pricing. It will take Oil to make a run sub-$29 for any real rally for pricing. And while there has certainly been that type of volatility recently, it appears that the Russian/Saudi deal has put a floor on Oil which is something we did not have the last time we broke below $29.
The Big 3
The following three items will garner the most attention from long bond traders this week (1) Oil, (2) GDP and (3) Durable Goods.
(1) Oil: Leveled off last week and if that bottom holds this week, we could see some of that premium get lifted out of MBS. Remember, Oil is really being treated as a proxy for Fed interest rate moves by bond traders.
(2) GDP: We will get the first revision to the previously released 4th quarter. The expectation is that it will remain positive but that the original reading could be almost cut in half. While this is trailing data, the size of the revision upward or downward can have a big impact on pricing this week.
(3) Durable Goods: The very volatile and rocky GDP data is expected to flip-flop and make some positive gains.
Inflation? Last week saw an increase in PPI and CPI but this week will be the Core PCE YOY reading which is supposedly what the Fed pays the most attention to. The market is expecting the YOY reading to drop from 1.4% down to 1.2%.
Treasury Auctions this Week
02/23 2 year note
02/24 5 year note
02/25 7 year note
The Talking Fed
02/23 Fed Vice Chair Stanley Fischer
02/24 Jeffrey Lacker, Rob Kaplan, James Bullard
02/25 Dennis Lockhart, John Williams
02/26 Jerome Powell, Lael Brainard
Across the Pond
There is a lot of data out of the Eurozone this week which is supposed to give traders an idea on what kind and how much stimulus is needed by the ECB. The weaker this data is, the better it is for bonds.
As expected, MBS have “hugged” the 10 day moving average all day as there was no domestic data to impact pricing. Bottom line: MBS had nowhere to go but down, but thankfully there is still very strong support which is preventing any major sell-off.
Texas Tea, Black Gold
The Secretary General of OPEC said that now both OPEC and non-cartel countries are willing to cooperate to find a solution to plunging oil prices. While there is no new agreements nor policy (and could turn out to be nothing in the long run), it did give oil a little lift to close above $31. Once it gets closer to $34, MBS will start to sell off materially, so this will need to be watched.
Across the Pond
Not everything is bad in the Eurozone. While the market is fixated on all of the “Brexit” news (they’re not going to leave, folks) we actually got some halfway decent news. The Markit (a non-official report) showed PMI Services at 53.0 and PMI Manufacturing at 51.0. Both were a little lighter than expectations but both were above 50 which is expansionary.
On Deck for Tomorrow
Case-Shiller Home Price Index, Existing Home Sales, Consumer Confidence, Richmond Fed and a 2 year note auction.