What happened last week?
Mortgage backed securities (MBS) lost 60 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week. It was our third straight week of declines in MBS (higher rates).
Texas Tea, Black Gold: WTI Oil prices continued to be the single biggest factor in pricing for the week as WTI Oil moved from a low of $36.09 on Monday to a high of $39.02 on Friday. That is a $3 swing in pricing. Why is this such a big factor in MBS pricing? Because it is a proxy for future inflation and therefore future Fed rate hikes. In February, WTI Oil hit $26.11. If Oil hits $45 in the next couple of months, then that would be a 73% increase! And that certainly can have a major influence on Fed policy.
Domestic Flavor
There was very little in terms of economic releases or Treasury auctions that had any real influence on MBS pricing and therefore rates. Our Treasury Department auctioned off 10 year notes and 30 year bonds. Both went off at a much higher rate than the auctions in February. It didn’t move the needle on mortgage rates but it means that we just rolled over a portion of our deficit at higher rates.
Wholesale Inventories: Were much stronger than expected, coming in at +0.3% vs estimates of -0.2%. This is the first reading for January and will cause many to upwardly revise their 1st quarter GDP estimates.
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 about every other labor indicator.
Consumer Credit: Consumers added another $10.5 billion in debt in January but that is less than market expectations of $16.5 billion and is a much slower pace than December’s $21.3 billion. 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.
Across the Pond
ECB: The European Central Bank took the following actions last week:
– Increased the amount of their monthly asset purchase volumes from the current level of 60 billion euros to 80 billion euros. This will run until March 2017 but can be extended if conditions warrant it.
– Lowered their key interest rate from 0.05% down to 0.00%.
– Lowered their deposit rate from -0.3% down to -0.4%.
– Lowered both of their growth and inflation forecasts for 2016 through 2018.
During the live press conference, President Mario Draghi said that he saw no reason for further rate cuts.
What’s on the agenda for this week?
This is a very pivotal week for MBS. It’s Central Bank Palooza with the Bank of Japan and our own Fed this week. The key here is the Fed’s dot plot chart. The long bond market has priced in zero to one rate hike this year. But if the Fed’s dot-plot chart shows 2 to 3 hikes (which could be the case), then we will get some pressure on pricing as the markets will try to recalibrate. Janet Yellen’s comments during her live press conference could also provide a lot of volatility. This is certainly not the week to “set it and forget it.” This a week for actively monitoring your pipeline.
This is a HUGE week for both domestic and foreign Central Bank and economic data.
Three Things
Here are the three events that have the greatest potential to impact pricing. (1) FOMC Meeting, 2) Oil Price, 3) Domestic Economic Data (Retail Sales, CPI).
The Talking Fed: We will have the FOMC (Federal Open Market Committee) interest rate decision and policy statement. They will also release their economic projections and hold a live press conference with Fed Chair Janet Yellen. In December, their dot-plot chart showed that the FOMC members anticipated up to 4 rate hikes in 2016. Currently the market had zero to one priced in. So, we will be paying close attention to that dot-plot chart to see if the Fed still is forecasting several rate changes.
Texas Tea, Black Gold: WTI are moving off of their highs from last week as Iran basically is saying that they will sell everything that they can produce (legally or illegally) and will not join in on production cuts. Boy…I am sure glad we gave them such a great deal..it’s really working out well for us.
Economic Data: We get both PPI and CPI. Last time around the YOY Core CPI was at 2.2%; it will be very important to our markets to stay above that 2.00% level again. Retail Sales is the most important report of the week and the market is expecting it to retract from its strong January levels, given the weak Consumer Credit report last week – that might be the case.
Housing Data: We some new construction data with Home Builders Sentiment and Housing Starts and Building Permits. We will need to parse through that data and focus on SFR.
Across the Pond
China: Had a mixed bag of economic data this weekend. Retail Sales had a YOY increase of 10.12% (which is something we could only dream of) but it was lighter than market expectations of 10.80%. Urban Investment YOY was 10.2% which was much stronger than forecasts (9.5%) and Industrial Production saw YOY gains of 5.4% but that fell short of expectations of 5.6%.
Japan: Saw a nice spike in Machine Orders (15.0% vs estimates of 3.0%). The Bank of Japan has their central bank meeting and rate decision on Tuesday and it can have an impact on pricing.
Europe: The European Monetary Union’s Industrial Production saw a nice spike of 2.1% vs forecasts of only 1.5%
Market Wrap-up
Overview
This was a very light day (no domestic economic data) and MBS have traded in a very narrow range. Glass is half full: The same floor of support on the intra-day trading channel held for the second straight session. Glass is half empty: For the second straight session MBS is going to close below the very important 50 day moving average which signals that these lower pricing levels will be here for a while.
Texas Tea, Black Gold
WTI moved off of their highs (but in a tight range) from last week as Iran basically is saying that they will sell everything that they can produce (legally or illegally) and will not join in on production cuts. Boy…I am sure glad we gave them such a great deal…it’s really working out well for us.
On Deck for Tomorrow
Retail Sales, PPI, Home Builders Sentiment, Bank of Japan, Business Inventories, Treasury TIC Flows and Empire Manufacturing.