What happened last week?
Overview
Mortgage backed securities (MBS) lost 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
Generally, MBS traded in some fairly narrow ranges for most of the week but there was a large -74BPS sell-off from intra-day highs on Thursday to intra-day lows on Friday.
There were very strong 3 year and 10 year Treasury note auctions but just a luke-warm 30 year Treasury bond auction. Overall, the data from overseas (China, Japan and Germany) showed inflation and growth. Domestically, there was another round of reports that showed growth at a slow pace, but growth nonetheless.
Retail Sales
The Headline December reading showed a nice monthly growth of 0.6% which was just a tick off of forecasts calling for 0.7%. But November was revised upward from 0.1% to 0.2%. When you strip out Autos, Retail Sales gained 0.2% That was less than expectations of 0.5%, but partially offsetting that was November being revised upward to 0.3%
Inflation?
The Producer Price Index MOM showed an increase of 0.3% which matched estimates. The more closely watched Core (ex-food and energy) YOY reading grew to 1.6% vs estimates of 1.5%.
Consumer Sentiment
The UofM Index (preliminary) for January came in close to estimates of 98.5 with a 98.1 reading. This will be re-released at the end of January.
What’s on the agenda for this week?
Overview
Wherever MBS are trading on Thursday afternoon, that’s also a spot to lock ahead of Trump taking office at noon on Friday. His comments about jobs, growth, etc., during his address could be taken negatively by bond traders that shy away from economic growth.
Three Things
The three areas that have the greatest potential to influence MBS trades and therefore back end pricing are: (1) Across the Pond, (2) Geo-political and (3) Domestic Flavor.
(1) Across the Pond: In the spotlight are Great Britain and the EU. The European Central Bank will have their latest interest rate decision and policy statement on Thursday morning. Bond traders hope to learn more about the path and timing of their revised asset purchase program that they announced at their last meeting.
(2) Geo-Political: There is no question that Trump’s comments have been moving markets and will continue to do so. He latest comments that our dollar is too strong has caused the dollar to move lower. The key will be Friday’s Inauguration. Donald Trump will take the Oath of Office at exactly noon NY time. After that brief oath, he is officially in power as our President. So, any comments in his address to the nation will carry even more weight than previously because now traders will view them as preceding official policy changes and some actually will be official policy immediately. This will have a dramatic impact on pricing in the afternoon.
Fed Chair Janet Yellen and our Treasury Secretary Jack Lew speak this week as well.
(3) Domestic Flavor: Our economic data will certainly take a back seat to the first two things. But CPI will get a lot of attention as the Core YOY reading is expected to tick up to 2.3%.
The Talking Fed
01/17 William Dudely, Lael Brainard and John Williams
01/18 The Fed’s Beige Book, Neel Kashkari and Janet Yellen
01/19 John Williams, Janet Yellen
01/20 Patrick Harker
Market Wrap-up
Overview
As expected, MBS made some small improvements. A “20 some-odd” improvement was anticipated and MBS are at +29BPS. There was only one low-level economic report and a few Talking Feds. There was a little momentum on the Brexit front in direct reaction to Teresa May’s early morning comments.
Domestic Flavor
Manufacturing: The Empire Manufacturing Index showed a slowdown in that geographical region, dropping from 9.0 in December down to 6.5 in January. But this index was negative for most of 2016; at least this reading was still above zero.
On Deck for Tomorrow: CPI, Industrial Production and Capacity Utilization, Housing Index, Fed’s Beige Book and Janet Yellen.
The Talking Fed
NY Fed President William Dudley (voting member) said that the Federal Reserve is unlikely to take actions that would “snuff out” the current economic expansion anytime soon because inflation is “simply not a problem.”
Fed Governor Lael Brainard (voting member and noted dove) said, “If fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid.”
Across the Pond
British Prime Minister Teresa May started out the day as she addressed the impending Brexit. She reaffirmed that Great Britain will leave the EU’s single market but that UKs parliament will vote on the final plan. She also said that it will be a “clean” Brexit. The British pound soared as a result, and MBS rallied on the uncertainty of a completely independent UK.