What happened last week?
Mortgage backed securities (MBS) lost 33 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher sideways from the prior week. It was the second straight week of declines in MBS (higher rates).
There was a 76 basis point spread between the lowest MBS pricing (highest rates) on Friday and the highest MBS pricing (lowest rates) on Tuesday. That volatility was mostly due to fluctuations in Oil prices.
Texas Tea, Black Gold
WTI Oil prices continue to be a major factor in our pricing and rates. Lower Oil prices are really a proxy now for bond traders to bet/hedge on the timing of the next rate hike by the Federal Reserve. As Oil stays close to $30 or below, it prolongs our time at these uber low mortgage rates as traders are pricing in zero chance of a rate hike this year due to no inflation. But as Oil moves towards $35 per barrel, MBS start to sell off as it opens the window (at least in traders’ minds) of a rate hike or two this year. Last week WTI Oil moved from $32.32 on Monday all the way up to $36.34 on Friday and that was the prevailing force in the downward pressure on MBS trades last week.
Domestic Flavor
Jobs, Jobs, Jobs: We had our BIG Jobs Friday.
- Non Farm Payrolls (NFP) February 242K vs estimates of 190K
- January NFP was 151K, revised upward to 172K
- December NFP was 262K revised upward to 271K
- Unemployment Rate 4.9% vs estimates of 4.9%
- Participation Rate was 62.7%, now 62.9%
- Average Weekly Hours, was 34.6, now 34.4
- Average Hourly Earnings (MOM) -0.1% vs estimates of +0.2%
- Average Hourly Earnings (YOY) was 2.5%, now 2.2%
As you can see, this is a mixed bag. Certainly the fact that more and more Americans are working (NFP gains now average 228K over the past three months) is an overall positive for our economy and the labor market in general. While the headline Average Hourly Wages (MOM) was weaker than expected…it was not really that weak. The overall number only fell 3 cents to $25.35 and the private-sector data remained unchanged at $21.32. And on a yearly basis, wages are still up over 2%. So this is slightly weaker than expected wage data…but it is not actually weak data.
ISM Non-Manufacturing: This is by far more important that the ISM Manufacturing reading as it accounts for almost 80% of our economy. Just like the Manufacturing data, this was a tad better than expected (53.4 vs estimates of 53.2), so a nice and healthy level but not by enough to move the needle on pricing.
Manufacturing: Two reports hit this morning and both were better than expected. The Markit Feb PMI reading hit 51.3 vs estimates of 51.0 and the more closely watched ISM Feb reading hit 49.5 vs estimates of 48.5. This was a healthy beat to the upside even though it is still below the 50.0 demarcation. It also was a nice gain over January’s 48.2. This positive momentum in manufacturing was certainly negative for pricing.
What’s on the agenda for this week?
The highs (in MBS) from three weeks ago are most likely gone and not obtainable again this year. WTI has clearly leveled out and pessimism over oil prices falling further and over our own economic data has pulled back and therefore there is no new catalyst for traders to jump into bonds. They may not be selling, but they are not adding more to their overweighed positions either.
Three Things: This is a very light week in terms of the number and type of domestic economic data. The following three items (listed in order of importance) have the greatest potential to impact back-end pricing: (1) ECB meeting and policy statement (Thursday), (2) WTI Oil prices (all week) and (3) 30 year Treasury bond auction.
Domestic Flavor
Treasury Auctions This Week:
- 03/08 – 3 year note
- 03/09 – 10 year note
- 03/10 – 30 year bond
The Talking Fed: We enter our “blackout” period this week as Fed officials are not permitted to speak a week before the FOMC meeting. But we do have Vice Chair Stanley Fischer today.
Across the Pond
The biggest event of the week with the potential to impact all financial markets is Thursday’s European Central Bank (ECB) meeting. Their president, Mario Draghi, has been stumping for several months now, alluding to more stimulus by the ECB. But he has manipulated the markets for a long time, promising his “bazooka” approach prior to many of the ECB policy meetings only to do nothing. Will this meeting see any “real” and new stimulus? If so…in what form? Simple rate cut will do nothing longer term. This meeting is a real “wild card” and could really give us some volatility this week.
Market Wrap-up
Overview
MBS were under pressure right out of the gate as WTI Oil continued to rise hitting an intra-day high of $38.11 (Brent Crude topped $40). But on a positive note, the proprietary intra-day channel has held (so far at least).
Domestic Flavor:
Jobs, Jobs, Jobs: The Labor Market Conditions Index dropped from -0.9 in January down to -2.4 in February. This is based upon 19 labor market indicators that are already out in the market place. Makes you wonder how this is weighted given the strength in just above every other labor indicator. MBS had no reaction when this report hit at 10EST.
Consumer Credit: Consumers added another $10.5 billion in debt in January but that is less than market expectations of $16.5B and is a much slower pace than December’s $21.3B. When you strip out auto and student loans and focus on revolving (credit card) debt (as a proxy for Retail Sales), it slipped $1.1B. This is showing weakness in the consumer sector.
On Deck for Tomorrow: Just a 3 year Treasury auction.
The Talking Fed:
Vice Chair Stanley Fischer said that we are basically in the front end of an inflation cycle, saying that “we may well at present be seeing the first stirrings of an increase in the inflation rate.” This does somewhat mirror comments from the Fed that they expected inflation to pick up in the 2nd half of the year…meanwhile the markets have no inflation priced in. One is going to be wrong.