What happened last week?
Mortgage backed securities (MBS) gained 59 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower and basically reversed the 60 BPS loss from the prior week.
Net of the see-saw of the last two weeks (-60, +59), MBS are down 52 BPS for the month of March.
MBS had a volatile week with a 103 BPS swing between intra-week lows and intra-week highs.
MBS were trending lower (higher rates) until Wednesday’s FOMC meeting. It was Central Bank Palooza last week and their collectively timid responses to global economic forces helped our long bonds to improve for the week as international investors bought our debt as the least-worst place to put their money.
The Talking Fed
We got the latest and greatest from our Federal Reserve. As expected, they left their key interest rate unchanged. The vote was 9-1 with the lone vote wanting to raise rates. The following is their official policy statement: Click here. They also released their summary of the Economic Projections. You can read the official release here.
The Not So Data Dependent Fed: In the policy statement and in Yellen’s comments, they made it clear that that they are less concerned with domestic data and more concerned with China, Oil and global financial stability. Reading between the lines…it once again appears that other foreign Central Banks (China, Japan) and even OPEC can dictate our own policies in the near term.
They did note that Inflation has picked up but remains well below their target rate and might not break above 2% for 2 or 3 years (unless oil spikes). They reaffirmed that they will raise the rate at a very gradual pace. They do acknowledge strong job gains. They did upgrade their concerns over global developments and that they continue to pose risk to our economy. The Fed is not considering nor going to implement any negative interest rate policies.
Projected Rate Path: In their published projections, the interest rate that has the greatest number of FOMC members (9) in it is 0.875% which would mean 2 rate hikes this year. There were a total of 7 that are projecting a rate of 1.00% or higher by the end of this year which would mean 3 rate hikes. So, while the headlines may say 2 rate hikes, in reality the members of the FOMC are actually solidly projecting 2 to 3 rate hikes this year which is a reduction from their last release (December) where their projections were for a solid 4 rate hikes.
Across the Pond
Japan: The Bank of Japan’s Governor Haruhiko Kuroda and his board left their key interest rate alone which is at -0.1%. This was widely expected. They did say that they were prepared to drive that rate even more negative if the economy warrants it.
England: The Bank of England left their key interest rate unchanged and express concern over the falling value of their currency (Sterling). They also expressed concern over global growth and the looming “Brexit” vote. As a result of potentially not being in the EU (they never have been a part of the European Monetary Union but are part of the trade union), they are going to hold back on spending (for obvious reasons) until they know the outcome of the vote.
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. They will be trading well below the 25 day moving average for some time. 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.
This is a light week for economic data There will be GDP but it’s the third time that this 4th quarter data will be released.
These are the three items that have the greatest potential to impact pricing this week: (1) The collective tone of the multiple Talking Feds this week (see list below), (2) Durable Goods Orders, and (3) Oil Prices.
The Talking Fed
- 03/21 Jeffrey Lacker, Dennis Lockhart and James Bullard
- 03/22 Charles Evans and Patrick Harker
- 03/24 James Bullard
Housing: This week are Existing Home Sales, FHFA Home Price Index and New Home Sales. None of these generally has an impact on pricing but will be interesting industry news.
Manufacturing: The Richmond Fed is this week and it will be interesting to see if it follows the same “better than expected” trend as last week’s Empire Manufacturing and the Philly Fed reports. But it will be Durable Goods Orders that will get the most attention. The last release saw a big beat to the upside and the market is expecting this reading to pull back into the negative but this report has been very volatile as of late.
GDP for the 4th quarter will be released (yet again) and it is expected to remain at 1.0%. This is tired and old data at this point and not as big a factor as the first release was.
Short and sweet. There was just one economic report and it didn’t move the needle on pricing as home sales is not a big mover. Oil has increased today and coupled with comments from Fed Williams, provided the pressure to send MBS lower and to once again close below the 50 day moving average.
Housing: The Existing Home Sales Report showed a MOM decline of -7% but YOY it still was north of 2%. Home Values continued to increase for the 48th consecutive month and inventories remained very low (4.4 months).
The Talking Fed
S.F. Fed President John Williams had already told a new publication that he will be advocating for a Fed rate hike in April. So, keep score…one member for a rate hike so far.
Atlanta Fed President Dennis Lockhart said that there is sufficient momentum in our economy to put a rate on the table for April. Make that 2 Feds for April.
On Deck for Tomorrow
Richmond Fed Manufacturing.