What happened last week?
Overview
Mortgage backed securities (MBS) lost 57 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week. The week before that, MBS lost 43 BPS. So, for the past two weeks, MBS have pulled back -100 BPS.
It was a holiday-shortened week that was dominated by focus on our Federal Reserve. It was a very light week for domestic economic data but there was strength in Retail Sales and the labor sector which are both very important to our economy. Fed Chair Janet Yellen’s comments on Friday about “letting our economy run hotter” was negative for bonds (and drove up mortgage rate) as bonds do not like inflation.
The Talking Fed
The Minutes from the last FOMC meeting were released on Wednesday. You can read the official release here.
It is an interesting read. Overall, it supported the expected “hawkish” tone. Members expressed concern over losing credibility (you know, making all these speeches that point to higher rates and then doing nothing about it). It was also clear that many supported a rate hike and/or felt that they were close to seeing labor slack tightening enough to justify a hike. There was also concern that if they didn’t raise rates soon, that it would snuff out the momentum in the labor market. But the bottom line for long bond traders is that obviously Yellen did not agree and that’s all that matters at this point.
Boston Fed President Eric Rosengren (one of the 3 dissenting votes) said that investors were probably right in placing “very high” odds on a U.S. interest rate increase in December, a step he argues is already overdue. “The market seems to think that there’s a very high probability of December. We’ll see how the economic data actually comes in, but I think that is priced appropriately.”
Fed Chair Janet Yellen spoke at the same conference in Boston and while she didn’t specifically address rate hikes she did discuss some academic conjecture on letting the economy running hotter for longer. She said “Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending, especially if accompanied by reduced uncertainty about future prospects,” Yellen said. “In addition, a tight labor market might draw in potential workers who would otherwise sit on the sidelines and encourage job-to-job transitions that could also lead to more efficient – and, hence, more productive – job matches. Finally, albeit more speculatively, strong demand could potentially yield significant productivity.”
Domestic Flavor
Retail Sales: This is the biggest piece of economic data this week. The September Headline MOM (month over month) matched expectations with a 0.6% gain. But the more closely watched Ex-Autos data was stronger than expected (+0.5% vs estimates of 0.4%) Plus, August was revised higher from -0.3% to -0.2%. If it weren’t for that revision. Ex Autos would have been up +0.6%.
Jobs, Jobs, Jobs:
The August Job Openings and Labor Turn Over Survey showed a trimming of labor slack as it fell from July’s revised 5.831M unfilled positions down to 5.433M which was below the market expectations of 5.724M.
Weekly Initial Jobless Claims were lighter than expected and (246K vs estimates of 255K) and last week was revised lower to 246K. This moved the more closely watched 4 week moving average down to 249,250 which is basically averaging 10K less than just a month ago. Labor Slack? Not in this metric. MBS gained 21 basis points from Wednesday’s close which caused fixed mortgage rates to slightly lower for the session.
What’s on the agenda for this week?
Overview
Experts continue to watch WTI Oil to see if it stays above $50 (currently down from Friday which is good for pricing) and the German 10Y (currently up from Friday which is bad for pricing) until Fischer’s speech this afternoon. Thursday’s ECB statement is very key and experts will be paying close attention to see if they address their bond buying program. Overall, MBS appear to have found a plateau and the down side is limited. For today, there may be some very small gains but it is not a signal that the trend of the past three weeks is going to reverse, so floating is only for those that are glued to the intra-day line chart.
Three Things
The three things that have the ability to have the greatest impact on pricing this week are: (1) The Talking Fed, (2) International Flavor, (2) Domestic Flavor.
(1) The Talking Fed: They will release their Beige Book on Wednesday which is prepared by the 12 districts to be used specifically in the November Fed meeting to make decision on policy and rates.
We also hear from the following Feds this week:
10/17 Vice Chair Fischer
10/19 John Williams, Robert Kaplan
10/20 William Dudley
10/21 Daniel Tarullo
(2) International Flavor:
– 10/17 German Buba President Weidman, ECB President Draghi.
– 10/19 Bank of Canada Policy Statement and Interest Rate Decision, NBS (Nation Bureau of Made up statistics) for China will hold their press conference. Great Britain 10Y auction, German 30Y auction.
– 10/20 European Central Bank Police Statement and Interest Rate Decision.
(3) Domestic Flavor:
There are very few reports that have the gravitas to impact pricing. The biggest one of the week will be the CPI report as it’s one of the few measures that has been showing inflation above 2.00% (Core YOY 2.3%). There are a ton of housing data this week with the releases of the Home Builders’ Index, Mortgage Applications, New Housing Starts and Existing Home Sales.
Market Wrap-up
Overview
MBS made some very small gains. As expected, they are in a plateau right now. Experts were watching Oil and the German 10Y and both pulled back which did give MBS a little lift but certainly not a trend reversal. Today’s domestic data had zero impact on pricing.
Domestic Flavor
Manufacturing: We a few lower-level reports to digest. The NY Empire State Manufacturing Index was once again in the red with a negative reading hitting -6.8 for October. The market was expected a small gain of 1.00.
Industrial Production for September matched the market forecasts with a reading of 0.1%. The Manufacturing reading was higher than expected (0.2% vs estimates 0.1%) and Capacity Utilization was very close to estimates (75.4% vs estimates 75.6%).
On Deck for Tomorrow: CPI and Home Builder’s Sentiment.
The Talking Fed
Federal Vice Chair Stanley Fischer seemed to support moving off of the bottom of the rate spectrum by saying that the U.S. economy may face longer and deeper recessions in the future if interest rates remain stuck at current low levels. In what may have been a response to Yellen’s comments on Friday (re: letting the economy run hotter for longer), he said that they should stick with their mandate of 2% inflation and warned that with Core PCE at 1.7%, it is currently very close to that 2% level. He also said that if inflation can’t get to 2% what’s the point in raising the target to 3%? Indicating that he is not in favor of letting the economy run hotter.