What happened last week?
Mortgage backed securities (MBS) gained 9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways during a very choppy week which saw a swing of 110 BPS from session high to session low.
The biggest domestic economic event was Friday’s jobs data which was largely shrugged off by the bond market, but international events such as the OPEC production freezes and concern over the Italian referendum vote caused big intraday swings in rates.
Jobs, Jobs, Jobs: Big Jobs Friday and it was a mixed bag with the three month rolling average for Non-Farm Payrolls remaining at 176K but Average Hourly Wages took a dip.
Tale of the Tape:
- November Non-Farm Payrolls (NFP) were higher than expected 178K vs estimates of 174K.
- October NFP revised lower from 161K down to 142K.
- September NFP was revised from 191K to 208K.
- The last NFP report was 11/04 and in that report, the 3 month rolling average was 176K. This new report released today, has our 3 month rolling average at 176K still.
- The Unemployment Rate dropped to 4.6% which is the lowest since September 2007 and was significantly less than the forecasts of 4.9%.
- The Participation Rate dropped down to 62.7% as another 446K workers left the work force. That means that now there are 95.1M people that are not in the work force which is an all-time high.
- Average Hourly Wages on a MOM basis dropped 0.1% which was lower than the market expectations of 0.2%. On a YOY basis, there were up 2.5% which is strong but lower than November’s reading of 2.8%.
Manufacturing: November ISM Manufacturing was much stronger than expected (53.2 vs estimates of 52.2), any reading above 50 is expansionary. Prices Paid were also higher than expected (54.5 vs estimates of 54.0). The November Chicago PMI blew the doors off any estimates, coming in at a very robust 57.6 vs estimates of 51.8. It’s the strongest reading for this bellwether indicator since January 2015.
Texas Tea, Black Gold
OPEC agreed to a 1.2M barrel production cut and non-OPEC members like Russia also agreed to production cuts which sent oil prices higher and pressured MBS on the potential impact of future commodity inflation.
What’s on the agenda for this week?
The only shot that MBS has at better pricing is if the ECB on Thursday announces a huge extension in the amount and duration of their bond buying program which is set to end in March. And that actually is a realistic possibility but maybe not a probability. Barring that, everything else points to pressure on pricing.
The three most important events that have the greatest ability to influence pricing this week are: (1) European Central Bank, (2) ISM Services and (3) Black Gold
(1) European Central Bank (ECB): On Thursday they will issue their latest interest rate decision and policy statement followed up with a live press conference with ECB President Mario Draghi. Of interest to bond traders is any change or extension in their bond buying program. This program is set to expire in March. The ECB had been letting the market think (through leaks from policy makers) that they were considering “tapering” (lowering the monthly amount of bond purchases) over the next couple of months until the program ended or extending it past March and tapering a little each month. But with the Italian vote this weekend, will they extend it completely and/or increase it?
(2) Domestic Flavor: This is a very light week for economic data. The most important data point will be Monday’s ISM Non-Manufacturing reading. The ISM Manufacturing reading last week was very strong but only accounts for about 1/3 of our economy. The services sector is the other 2/3 so this reading is very important.
(3) Texas Tea, Black Gold: Oil Prices are on the move again with Brent Crude briefly breaking above $55 for the first time in 16 months and WTI Oil is above $52. IF WTI can break above $55, then that will be very negative for pricing. IF WTI can break back below $50, then that is very positive for pricing.
The Talking Fed
We get our last dose of Fed speak today as they enter their “black out” period prior to next week’s Fed meeting.
New York Fed President William Dudley said it is premature for the central bank to consider adjusting its rate-hike plan following Donald Trump’s U.S. presidential win and that “assuming the economy stays on this trajectory, I would favor making monetary policy somewhat less accommodative over time by gradually pushing up the level of short-term interest rates.”
Chicago Fed President Charles Evans said that while the U.S. labor market is “kind of tight,” wage growth is slow and inflation is still too low.
We will hear from St. Louis Fed President James Bullard this afternoon.
Across the Pond
Eurozone: Their Retail Sales were stronger than expected, rising 1.1% (vs estimates of 0.9%) on a MOM basis and 2.4% on a YOY basis. Also, the Markit PMI for November showed expansion with a reading of 53.9 which just missed the consensus estimates of 54.1.
Of the three things that are likely to have the most impact on pricing this week, two had a very large impact on pricing today. First was a much stronger than expected ISM Services reading which drove MBS down to their worse levels of the session (-31BPS). Oil prices certainly hurt MBS on their way up and then gave MBS a lovely boost when they fell. There was a nice price improvement as oil prices fell. However, MBS remain within the same trading channel as Friday and Thursday.
There was a -110 BPS swing from the weekly high to the weekly low last week and when the smoke cleared, it was just a 9 BPS difference from the weekly open to close…certainly ZERO reward for any risk taken last week.
Services: The November ISM Non-Manufacturing (Services) hit its highest level since November 2015 with a 57.2 vs estimates of 55.3. Anything above 50 is expansionary. This reading shows that 2/3 of our economy is growing at a nice clip.
Jobs, Jobs, Jobs: The fairly new Labor Market Conditions Index doubled from 0.7 in October to 1.5 in November.
On Deck for Tomorrow: Trade Balance, Factory Orders and Non-Farm Productivity.
The Talking Fed
St. Louis Fed President James Bullard said that if Trump’s plan is properly designed and executed, policies to boost infrastructure, modify regulations for some industries, and overhaul the tax code “may have some impact…if they are directed towards improving medium-term U.S. productivity growth.” He also reminded the marketplace that raising interest rates is simply moving us out of emergency protection mode: “The economy is not in recession today, so these policies should not be viewed as countercyclical measures.”