What happened last week?
Overview
Mortgage backed securities (MBS) lost 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to slightly higher for the week.
It was a holiday-shortened week with really only 3 full days of trading in the bond market. Overall, there was some solid economic data in housing and manufacturing and the Minutes from the last Fed meeting showed that the Federal Reserve was on a path to hike rates prior to knowing the election results.
Housing
October Existing Home Sales were much better than expected and hit 5.60M vs estimates of 5.43M units. Home Prices continue to rise and Inventory continues to be a huge problem with very low levels available to purchase. New Home Sales were lighter than expected on a month-over-month basis with a reading of 563K units vs estimates of 590K. But on a year-over-year basis, sales were up 17.8%.
Manufacturing
October Durable Goods Orders were very robust and were much stronger than market expectations (4.8% vs estimates of 1.5%) and September was revised higher from -0.1% all the way up to +0.4%. When you strip out the very volatile transportation sector, Orders were up a healthy 1.0% which was five times higher than the market expectations of 0.2%
The Talking Fed
The FOMC released the minutes from their last meeting which was concluded just before the elections. There wasn’t really anything new in the minutes that had two out of the ten voting members wanting a rate hike at the November meeting. The discussions were certainly slanted towards a rate hike in December. They said it might be appropriate to raise interest rates “relatively soon” against a backdrop of an improving labor market and somewhat higher inflation and that “most participants expressed a view that it could well become appropriate to raise the target range for the federal-funds rate relatively soon,” the Fed minutes reported.
What’s on the agenda for this week?
Overview
Experts expect that the last trade on Friday will be worse than the first trade on Monday; however, there is plenty of room for some “choppiness” in between those points with some many big name releases hitting every day. Overall, the aggregate in the domestic data is expected to continue to show improvement, and that is negative for bonds. The only way to see a real improvement in pricing is for OPEC to fail to accomplish anything on Wednesday (a real possibility actually) and for Friday’s jobs data to be very weak (not a real possibility).
Three Things
The three things that have the greatest potential to impact your pricing this week are: (1) Jobs, Jobs, Jobs, (2) Domestic Data and (3) OPEC.
(1) Jobs, Jobs, Jobs: There is a glut of wage and or jobs related data this week with ADP Private Payrolls, Personal Income, Challenger Job Cuts, Weekly Jobless Claims and Big Jobs Friday which will include the Unemployment Rate, Non-Farm Payrolls and Average Hourly Earnings. The most important data point is the Average Hourly Wages which was 2.8% on YOY basis last time around. Anything above that level would be negative for pricing. Basically, the bond market has a December rate hike ALMOST priced in. It would take a dismal wave of jobs data to change that bias.
(2) Domestic Data: Even without the very important jobs data, there is still a ton of big name economic releases that have the gravitas to move the needle. First up is the first revision to the 3rd quarter GDP data and, given the huge beat in last week’s Durable Goods Data, that may break above 1.5%. But there is also Personal Spending and a very important YOY Core Personal PCE, which is that magical data point that the Fed uses to measure inflation. Last time around it was 1.7%…will it creep closer to their target rate of 2.0%? There are also very important manufacturing releases with Chicago PMI and ISM Manufacturing.
(3) Texas Tea, Black Gold: Wednesday’s OPEC summit in Vienna may or may not yield any agreement. The market is expecting at least a “freeze” but that will largely depend on Iran’s decision. Their comments have been moving oil prices as they change positions. Even if a deal (in principal) is reached, no one expects Iran to honor or accurately disclose production levels….still it would be a long overdue symbolic gesture that OPEC still has relevance.
The Talking Fed
There is a barrage of Fed speak this week before entering next week’s “black out” period prior to the Fed meeting the following week:
11/29 Stanley Fischer, William Dudley
11/30 Robert Kaplan, Jerome Powell, Loretta Mester and the release of the Fed’s Beige Book
12/02 Daniel Tarullo
Across the Pond
The bond market is continuing to watch political events in Germany, France and most notably Italy where as many as 8 Italian banks may face problems moving forward.
Market Wrap-up
Overview
MBS gained some traction on four factors: (1) speculation that European Central Bank (ECB) President Mario Draghi will extend their bond buying program, (2) fear over potential Italian bank failures, (3) a pull-back in oil from its intraday highs and (4) bond prices have fallen significantly and are attracting some buyers again.
There were no domestic events today.
Texas Tea, Black Gold
WTI Oil improved for the session but moved off of its intraday high of $47.65 down to $46.89 as OPEC only released a simple schedule for 11/30 and no new agreement was announced.
Across the Pond
ECB: President Mario Draghi made several comments that have led bond traders to speculate that at the very least, their bond buying program will be extended on December 8th. The ECB is due to decide next week on whether to extend beyond March its 1.74-trillion-euro ($1.84-trillion) bond-buying program, the centerpiece of its much-criticized stimulus policy.
On Deck for Tomorrow
First revision to the previously released 3rd quarter GDP, Case Schiller Home Price Index and Consumer Confidence.