What happened last week?
Mortgage backed securities (MBS) lost 43 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move to their highest level since June 23rd.
The biggest movement of the week came after Thursday’s Durable Goods Orders which drove MBS to their worst levels (highest rates) of the week. The strength in the August revisions and September data caused bond traders to sell off ahead of Friday’s 3rd quarter GDP data which they were betting would be higher than forecasts, and they were right. From a technical perspective, the 200 day moving average was tested but it held which kept rates from rising even more.
The Headline September reading was lighter than expected (-0.1% vs estimates of +0.1%) However, August was revised upward from 0.0% all the way up to 0.3%. So, if August had not been revised upward, the net activity for September would have more than matched market forecasts. When you strip out the huge Transportation sector, Core Durable Goods matched expectations with a reading of 0.2%. August was revised upward from -0.4% to +0.1%.
The preliminary 3rd quarter GDP reading was much stronger than market expectations with a 2.9% reading (vs estimates of 2.5%). The Product Price Index also beat expectations (1.4% vs estimates of 1.3%) for the quarter. Core PCE quarter-over-quarter was up 1.7% which was stronger than expectations of 1.6% and just 0.3% away from the magical unicorn level of 2.0%. This 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 seemly supported a rate hike in December. Overall, our housing data looked healthy and inflation looked to be in check.
There were two different data sets on home appreciation this morning. The Case Shiller Home Price Index rose 5.1% vs estimates of 5.0%. This is a year-over-year reading and is a very small sample size of just 20 metro areas.
The FHFA released their monthly MOM change in Home Prices which were higher than expected (0.7% vs estimates of 0.5%). This report has much more value as it is derived from all of FNMA, FHLMC, FHA, VA purchase loans during that month.
New Home Sales: The September reading hit 593K vs estimates of 600K and August was revised downward from 609K to 575K which is a sizable revision downward.
The October reading was lighter than expected (98.6 vs estimates of 100.8) and September was revised lower (from 104.1 down to 103.5) but anything above 100 is still a great reading. This miss to the down side is a slight positive for pricing. Mortgage backed securities MBS lost -30 basis points (BPS) from Wednesday’s close which caused fixed mortgage rates to move higher for the session.
What’s on the agenda for this week?
The week will largely depend on the Fed and Friday’s NFP report. For better pricing and a trend reversal there needs to be: (1) The Fed moves the market away from expecting a December rate hike, AND (2) Average Hourly Wages is below 0.0%, AND (3) NFP is around 125K for October, AND (4) September is revised lower. You can see that is asking for a lot to go completely against every trend.
The three things that will have the most impact on pricing this week are: (1) Central Bank palooza, (2) Jobs, Jobs, Jobs and (3) Manufacturing/Servicing.
(1) Central Bank Palooza: There will be the Bank of Japan on Tuesday (will we see “helicopter money”?), our Federal Reserve on Wednesday (will they raise rates now or December?) and the Bank of England on Thursday (will we learn more about Carney’s term and will they lower rates given that their economy is actually doing well?).
(2) Jobs, Jobs, Jobs: There is a glut of jobs/wage data this week including: Personal Income, Unit Labor Costs, ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Non Farm Payrolls, Unemployment Rate, Average Hourly wages and more. As usual, the emphasis will be on Friday’s NFP data. The market is expecting 175K but just as important will be the revision to September’s reading of 156K. Average Hour Wages YOY jumped to 2.6% last time around and will also get a lot of attention from bond traders.
(3) Manufacturing and Services: The October Chicago PMI was lighter than expected (50.6 vs estimates 54) but it was still expansionary (meaning that October expanded over and above September’s activity). There is still Factory Orders and ISM Manufacturing this week. But the most important reading of the week is Thursday’s ISM Services reading which accounts for approximately 80% of economic activity (Manufacturing is about 20%).
As expected, MBS traded in a very narrow range with no real catalyst to break out of the intra-day channel.
Manufacturing: The October Chicago PMI showed monthly expansion but at a slower clip than the market expected (50.6 vs estimates of 54.0). It was a mixed bag with a nice pick-up in the employment category but saw a pullback in new orders.
Personal Outlays: Personal Spending Rose 0.5% vs estimates of 0.4% and was a nice reversal from August’s -0.1%. Personal Income matched expectations with a reading of 0.3% and marked the 17th straight month of month-over-month gains in income.
Inflation? While the headline MOM PCE rose 0.2%, the more closely watched Core PCE on a year-over-year basis remained below 2% at 1.7%.
On Deck for Tomorrow: ISM Manufacturing, Construction Spending and Total Auto Sales.
Across the Pond
Eurozone: Their 3rd quarter GDP matched expectations with a 0.3% quarter-over-quarter basis and 1.6% on a year-over-year basis.