What happened last week?
Mortgage backed securities (MBS) gained 15 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
It was Central Bank palooza last week with all three (Bank of England, Bank of Japan and our Federal Reserve) deciding to stand pat on any rate or policy changes. We also had our Big Jobs Friday but neither event really had an impact on interest rates as they were channel locked.
The Federal Reserve Open Market Committee (FOMC) voted to keep rates the same. This was widely expected, but there were a few subtle changes from their last meeting. First, there were two dissenting votes (meaning two voting members wanted to raise rates). They were Mester and George. However, last time there were actually three dissenting votes. Mester, George and Rosengren. This time around, Rosengren moved his vote over to the other side.
Some key takeaways from their policy statement:
- Their key statement of the day: “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen.”
- They replaced their September statement of “Inflation is expected to remain low for the near term” with “Inflation is expected to rise to 2 percent over the medium term” which is a slightly “hawkish” shift.
- The Fed also changed the language to the phrase that “Market-based measures of inflation compensation remain low” and replaced it with “…have moved up but remain low.”
Big Jobs Friday
Overall a very solid jobs report but not to the degree that it was a shock to the system.
Tale of the tape: The following are the key areas of interest.
- Non-Farm Payrolls for October were lower than expected (161K vs estimates of 175K). There were major revisions to the prior months and most likely we will see this 161K revised next month as well. August was revised from 167K to 176K, September was revised from 156K to 191K. The rolling 3 month average last month (as released and prior to revisions) was 192K per month, the new rolling 3 month average is 176K which is a nice level considering that labor slack is tightening.
- Average Hourly Earnings were higher than expected (0.4% vs estimates of 0.3%) and more importantly the YOY reading shot up to 2.8% which is the fastest pace in 8 years. This is certainly reflective of higher wage jobs (mostly in the services industry) being added.
- Unemployment Rate fell to 4.9% which matched expectations and while it is below the important psychological mark of 5.0%, the Participation Rate fell from 62.9% to 62.8% (more people unemployed but not seeking employment) which causes the Unemployment Rate to fall.
- Average Hourly Work Week remained unchanged at 34.4 hours. Mortgage backed securities gained just 6 basis points (BPS) from Wednesday’s close which caused fixed mortgage rates to move sideways for the session.
What’s on the agenda for this week?
This is a holiday-shortened week (MBS trading will be closed Friday for Veterans Day). Look for MBS to be stuck in the same trading channel until the results of the election are known on Wednesday. If Clinton wins, then MBS will stay in a similar range. If Trump wins, MBS will be under pressure. Not because the bond market prefers one over the other, but because Trump is viewed to be more stimulative to the economy (and therefore inflationary) and bonds shy away from any modicum of inflation. Our domestic data will have no impact on pricing this week.
The three events have the greatest potential to impact back end pricing this week are. (1) The Election, (2) The Talking Fed and (3) Foreign Data.
(1) The Election: The one good thing about Tuesday’s election is that it will remove an element of uncertainty. Once the bond market knows the path moving forward, it can begin to adjust accordingly. Not only is the Presidency key but so is the Senate. We could see a lot of initial volatility but then bonds will normalize. Basically, the bond market will be calmer with Clinton as she is more of a “known” but Trump presents a lot of “unknowns” such as a potential Dodd-Frank reform, Obamacare reform, tax rates, control over House and Senate, a potential budget for the first time in 10 years, a possible change in the Fed reserve chair, etc. Many of those items also can have a stimulative impact on the economy in the shorter term and will weigh on bonds as result.
(2) The Talking Fed: There is a healthy dose of Fed Speak this week and they will be able to know what type of political environment they will be operating under moving forward. We will hear from Charles Evans, Neel Kashkari, John Williams and James Bullard.
(3) Across the Pond: There are key releases which include the minutes from the last Bank of Japan meeting, Chinese Imports and Exports as well as PPI and CPI, German Industrial Production, and PPI.
Treasury Auctions This Week
11/08 3 year note
11/09 10 year note
11/10 30 year bond
It was a slow start to our holiday-shortened (Friday is Veterans Day) week. There were only two lower level domestic economic releases that had no real impact on pricing as the bond market is in a holding pattern until after the election.
Jobs, Jobs, Jobs: The October Labor Market Conditions Index (a combination of 19 labor/wage reports) rose to 0.7. It was originally released at -2.2 for September but was revised upward to -0.1. The October reading was only the third time this year that the index was in positive territory.
Consumer Credit: The monthly change in debt levels for September increased by another $19.29B which was higher than expectations for only $18.00B. Revolving (charge cards, etc.) increased 5.2 and Non Revolving (student loans, auto loans) increased 6.7.
On Deck for Tomorrow: The Presidential Election, JOLTS and the 3 year Treasury note auction.
Across the Pond
Germany: Missed on their Factory Orders on a MOM basis (-0.6% vs estimates of +0.3%); however, on a YOY basis it saw a nice uptick from 2.0% all the way up to 2.6%.
Eurozone: Retail Sales were a mixed bag with the MOM reading beating expectations (-0.2% vs estimates of -0.3%) while the YOY reading fell short (1.1% vs estimates of 1.3%).