What happened last week?
Overview
Mortgage backed securities (MBS) lost 79 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
It was another holiday-shortened week that saw MBS under pressure Wednesday and Thursday in response to the bond market interpreting the Fed’s Beige Book as leaning towards more growth and wage/price inflation than originally thought.
Domestic Flavor
Housing: As usual, a mixed bag with these readings. New Housing Starts were a smidge better than expected (1.226M vs estimates of 1.200M) and Building Permits were a smidge lower than expected (1.210M vs estimates of 1.225M). Regardless, both are basically at around 1.2M which is an okay level but well below longer term historical norms.
Weekly Mortgage Applications increased by 0.8%, led by Refinances which jumped 7.0%. Purchases fell -5.0%.
The NAHB Index hit 67 which was 2 points lower than November’s downwardly revised 69. Any reading above 50 is positive and a reading in the upper 60s is very robust.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were much lower than expected (234K vs estimates of 254K) plus, the more closely watched 4 week moving average dropped to 246,750 which is extremely low. Continuing Claims fell to 2.046M which was also better (lower) than the market expectations of 2.073M.
Manufacturing: The Philly Fed Business Outlook Survey was hot, hitting 23.6 which far outpaced the consensus estimates of 15.3 and was the highest (best) reading since December 2014.
Industrial Production was twice as strong as expected (0.8% vs estimates of 0.4%). But most of that beat is due to comparing the December data to November’s downwardly revised -0.7%, so it is skewed higher. Regardless, it was still a nice reversal from November. Capacity Utilization edged out estimates (75.5 vs estimates of 75.3)
The Talking Fed
The Beige book (read the official report here) showed continued growth in our economy with 10 out of the 12 Federal Districts reporting that they are seeing “moderate or modest” growth. Labor market conditions remained tight in the majority of the districts with several noting problems with finding workers with the skill sets to match the job openings. They also noted wage pressure in many districts and even wage pressure in a couple of districts that were due to new minimum wage laws going into effect in 2017.
Inflation was a concern as 8 out of the 12 districts reported costs moving upward on final goods and agricultural items. Atlanta saw costs as flat.
Yellen is Yelling: Janet Yellen spoke in San Francisco. You can read her prepared remarks here. Essentially, she outlined what the job of the Federal Reserve is and what its dual mandate is. She said that the Fed basically views 4.75% as full/maximum employment (currently we are at 4.7%). What is interesting is that she said there is still room for the labor market to improve.
Inflation?: The December Consumer Price Index matched expectations across the board. The key is that both the headline YOY (2.1%) and core YOY (2.2%) are both over 2.0%. So trending upward.
What’s on the agenda for this week?
Overview
A lot of volatility is expected this week and you should not trust a trend upward or downward. Today, (on an intra-day basis only) MBS are expected to make a move upward in the +21 to +35 BPS range. There is even a little more room to run than that.
Three Things
The three things that have the greatest ability to impact pricing this week are: (1) Donald Trump, (2) GDP and (3) Treasury Auctions.
(1) President Trump: By far the most important factor this week as the bond market will react to Executive Orders and any other policy updates. Of interest is backing out of TPP (expected today) and the beginning of renegotiating NAFTA. He also made statements of putting together “massive” tax reductions for the middle class and corporations.
(2) GDP: Wet get our first look at the 4th quarter GDP and the final revision to the 3rd quarter GDP on Friday. This is the most important economic event of the week.
(3) Treasury Auctions: These are shorter term notes this week but will be the first sales of the new administration. Today, 2 year note, Tuesday is 5 year note and Wednesday is the 7 year note which will be the most important of the three.
Market Wrap-up
Overview
There was a light start to the week as there were no domestic economic reports that were released. MBS received some positive momentum due to concerns over “border taxes” and a potentially economically crippling trade war.
Geo-Political
President Trump ended the TransPacific Partnership (TPP) trade agreement which had the U.S. on equal footing with 11 other nations, some of which were so small they had less GDP than Texas.
Domestic Flavor
President Trump froze all new hiring of Federal employees and froze any raises for them as well.
On Deck for Tomorrow: Existing Home Sales, Richmond Fed Manufacturing and our short term 2 year note auction.
Across the Pond
Japan (world’s number 3): Their November Industry Activity increased by 0.3% vs estimates of 0.0%, while their Leading Economic Index fell from 108.0 in October down to 102.8 in November.
China (number 2): Their Leading Economic Index hit 0.8% in December, a nice reading, just below the November level of 1.0%.