What happened last week?
Mortgage backed securities (MBS) gained 35 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower for the week.
It was a very light week for domestic economic data. We did hear from the Federal Reserve’s number 2 Stanley Fischer and number 3 William Dudley and both seemed to support a rate hike in December. Overall, our housing data looked healthy and inflation looked to be in check.
Housing: The National Association of Home Builders released their October Home Builders Sentiment and it hit 63 vs estimates of 63. Anything above 50 is a positive reading and this has been tracking in the 60s. So, this is another good housing data point.
September Existing Home Sales were stronger than expected with 5.47M units vs estimates of 5.35M units. The most important component of the report (for our industry) is that Single Family Residences jumped 4.1% to 4.86 million units.
Inflation? While the Fed uses the PCE as their inflation gauge, we did get Consumer Price Index data which also reflects inflation. The Headline CPI data on a MOM basis matched forecasts with a reading of 0.3% and on a YOY basis with a reading of 1.5%. But that 1.5% is a nice improvement from August’s 1.1% pace. The Core (ex food and energy) MOM data was 0.1% vs estimates of 0.2% and YOY it was 2.2% vs estimates of 2.3%.
Beige Book: The Fed’s Beige Book was released. This report is specifically prepared so that it may be used in the November Fed Meeting. It showed growth across most of the 12 regions and was fairly upbeat. Many business leaders cited difficulties in finding qualified workers to fill open positions and having to pay a higher wage to attract qualified workers away from their current positions.
Federal Vice Chair Stanley Fischer (voting member) 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 (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.
New York Fed Reserve President William Dudley (voting member) said, “If the economy stays on its current trajectory I think…we’ll see an interest rate hike later this year,” and that if it did go up by a 1/4 point that “is not that big a deal.”
Across the Pond
The European Central Bank kept their key interest rate unchanged at 0.0% and their deposit rate at -0.4%. The bond market focused on President Mario Draghi’s press conference where he was asked several different times about both the corporate and government asset purchase program. All that he would say was that “tapering” was not a topic of discussion at this current ECB meeting. He also said that the asset purchase program cannot continue forever and must conclude at some point. He basically regurgitated their comments from the last statement that the current program will remain in place and that they can make changes to it if they feel it is warranted.
What’s on the agenda for this week?
The three things have the greatest potential to impact pricing this week are: (1) GDP, (2) The Talking Fed and (3) Oil Prices.
(1) GDP: We get our first look at the 3rd quarter GDP with the preliminary release on Friday. The markets are expecting a fairly robust rate of growth in the 2.5% to 2.7% range. Anything north of 2.5% will be negative for pricing. It would take a reading below 2% for MBS to rally.
(2) The Talking Fed: There is a big dose of speeches Monday and Tuesday and then they enter the “black out” period where they are not permitted to make public comments leading up to the November Fed meeting.
10/24 William Dudley, James, Bullard, Charles Evans and Jerome Powell
10/25 Dennis Lockhart
(3) Texas Tea, Black Gold: WTI has been above the important “line in the sand” of $50 per barrel; however, it is under pressure as Iraq first said that it will only agree to a freeze in production output if they raise Iraq’s target to more than they are producing now (hardly a freeze) and now say that they want an exemption from production levels. If this causes WTI Oil to drop below $50, it will be positive for MBS.
Treasury Auctions this Week
10/25 2 year note
10/26 5 year note
10/27 7 year note
There will be more housing news this week but last week’s Existing Home Sales data is the most complete set in the industry. This week will be the Case-Shiller Home Price Index, The FHFA Home Price Index, New Home Sales and Pending Home Sales. All will be interesting to watch but none will impact pricing.