What happened last week?
Mortgage backed securities (MBS) gained 12 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. We had another holiday-shortened week (Monday was closed for New Year’s) and a choppy session that saw bid/ask levels that were unrealistic and not based upon any market fundamentals. Actually, under a “normal” market, MBS would have been under more pressure (higher rates) as there was very strong ISM data, a more “hawkish” tone from the Fed minutes, and Wage data that jumped up to 2.9% gains.
Domestic Flavor – Jobs, Jobs, Jobs
Big Jobs Friday: The much anticipated last employment report from 2016 is here. Here is the Tale of the Tape:
Non-Farm Payrolls: The December number (which will be revised two more times) came in lighter than market expectations (156K vs estimates of 178K). Before saying this is a weak report, the fed (and bond market) looks at the average/trend since these number often see very large revisions. November was revised upward significantly from 178K up to 204K (+26K), while October was revised lower by a smidge from 142K to 135K (-7K). The most closely watched NFP data point is not the headline 156K. It is actually the 3 month rolling average which (after December’s release and revisions to prior months) is now 165K. In November, the rolling 3 month average was 176K which is only an 11K change.
Wages: This is the most important piece of data. The Average Hourly Wages for the Month increased by 0.4% which was higher than estimates of 0.3% and a large turnaround from November’s -0.1%. But, more importantly, Average Hourly Wages increased by 2.9% on a yearly basis which is the hottest level that we have seen in 8 years. It matched market expectations of 4.7% and was a slight uptick from November’s 4.6% due to the Participation Rate increasing from 62.6% to 62.7%.
ISM Non-Manufacturing (Services): The services sector accounts for over 2/3 of our economic output. And it came in higher than expectations (57.2 vs 56.6). Any reading above 50 is expansionary and any reading above 55 is very hot indeed.
The Talking Fed
The Minutes showed a more “hawkish” Fed concerned about future inflation than what was perceived by the markets after their original policy statement.
• Almost all also indicated that the upside risks to their forecasts for economic growth had increased.
• About half of the participants incorporated an assumption of more expansionary fiscal policy in their forecasts.
• Many participants judged that the risk of a sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly.
• Almost all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increase.
What’s on the agenda for this week?
Look for a choppy session this week with some room to run up and down in pricing. This very well may be the trend until after January 20th, at which point experts expect downward pressure.
The three biggest events of the week that have the greatest ability to impact back end pricing are: (1) The Talking Fed, (2) Across the Pond and (3) Domestic Flavor.
(1) The Talking Fed:There is a glut of Talking Feds this week with the spotlight on Janet Yellen:
01/09 Eric Rosengren and Dennis Lockhart
01/12 Charles Evans, Pat Harker, Dennis Lockhart, James Bullard and Janet Yellen.
(2) Across the Pond: There is a large amount of very important data out of China (world’s number 2 economy) with Imports/Exports, PPI and CPI. Germany (world’s number 4 economy and the driving force for the Eurozone) will have a very important 10-year bund auction, Industrial Production, Real GDP and Wholesale Trade. The Brexit will continue to gain a lot of attention as Prime Minister May makes comments on the timing and desired type of post-EU existence for Great Britain.
(3) Domestic Flavor: The biggest report of the week will be Friday’s Retail Sales data. We already know from last week’s Total Vehicle Sales data that Auto Sales will be strong, so we will focus on the Retail Sales Ex-Auto. We also get some inflationary data with PPI, more jobs data as well with the LMCI, JOLTS and Weekly Claims.
Treasury Auctions this Week
01/10 3 year note
01/11 10 year note
01/12 30 year bond
As expected, MBS stayed within range as it was a fairly uneventful day. The economic reports today were lower level and did not have the gravitas to impact pricing. WTI Oil did slip and provided some help. Both talking feds made it clear that there would have to be more rate hikes if the right kind of policy/stimulus was passed this year by Trump. But since there are no official new policies, they can’t speculate too much.
Jobs, Jobs, Jobs: The newly created Labor Market Conditions Index fell 0.3 in December. November was revised upward from 1.5 to 2.1. This report just has zero impact on trades.
Consumer Credit: The November reading was much higher than expected ($24.5B vs estimates of $18.0B). Revolving Credit increased by $11B which may mean a very strong holiday sales season and may mean a strong Retail Sales report on Friday.
The Talking Fed:
• Boston Fed President Eric Rosengren (non voting member in 2017) said that it is appropriate for the Federal Reserve to be raising rates, but the exact timing depends on economic data, international conditions and what happens with fiscal policy (which is yet unknown).
• Atlanta Fed President Dennis Lockhart (non voting member in 2017) said, “I shifted the weight of risk to the upside,” but that he still only has two rate hikes in his own personal forecast. But that could easily change depending on any new fiscal stimulus out of the Trump administration.
On Deck for Tomorrow: JOLTS, Wholesale Inventories and our 3 year Treasury note auction.