What happened last week?
Mortgage backed securities (MBS) gained just 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. While just a 2 BPS move seems very tame, it was actually a very choppy week that saw large swings in rates and pricing. MBS had an intra-week swing of -96 BPS from highs (lowest rates) to lows (highest rates).
As far as economic data, it had very little impact on rates. The most important data of the week didn’t hit until Friday with the 4th quarter GDP and Durable Goods Orders. There were 2, 5 and 7 year Treasury note auctions that were luke-warm in terms of demand compared to 2016 levels and had no impact on long bond prices. The biggest shifts in intra-day pricing levels was the bond market’s reaction to President Trump’s Executive Orders which included freezing government hires and salaries, ending TPP, tightening immigration policies and funding the building of the “the wall.” He had some strife with the Mexican President but had a great meeting with the British Prime Minister.
GDP: We got our first look at the 4th quarter GDP data. It was a bit of a miss as it came in at 1.9% vs estimates of 2.1%. However, this will be revised three more times and statistically, GDP is usually revised upward. The only real bright spot was a pick-up in business spending. The purchase price index saw an increase of 2.1% from the 3rd to 4th quarters, so that is yet another data point that shows inflation over 2.0% (CPI being the other).
Durable Goods Orders: The headline reading was a huge miss to the downside (-0.4% vs estimates of +2.6%). But there has been a lot volatility in the headline reading as just a few airplane orders can skew it dramatically. So, when looking at the Ex-Transportation reading, it matched expectations of modest growth with a 0.5% reading. Those are month-over-month (MOM) readings. The YOY (year-over-year) Ex-Transport reading is now 3.5% which is a good trend line.
Consumer Sentiment: The January University of Michigan’s Survey was revised upward from the previously released 98.1 to 98.5. This is a solid reading and is the best in 13 years.
What’s on the agenda for this week?
Look for more volatility again this week as the bond market reacts to the Three Things. This is not a week to be complacent.
The Three Things that have the greatest ability to impact back end pricing this week as they will drive MBS trades are: (1) Donald Trump, (2) The Fed and (3) Domestic Flavor.
(1) Donald Trump: He signed 17 Executive Orders in his first week. Now that we enter week 2, there will be more. Of importance is how he handles work visa programs that the technology sector relies heavily on. His comments and policies will have the largest impact on pricing.
He has already signed an Executive Order this morning regarding regulations that is aimed at making it easier for small businesses to start up and operate with less red tape.
(2) The Talking Fed: On Wednesday will be their first action of the year. Their policy statement and interest rate decision will have a big impact on rates. However, the market is currently betting that nothing will happen at this meeting, mostly because this is one of the meetings where there is no live press conference with Janet Yellen. While it very well may be that the Fed does not move to tighten again so soon after raising rates in December it’s a big mistake by pundits and traders to assume that no action can be taken absent a press conference as rate hikes have been announced in between Fed meetings before. This meeting is interesting as it’s a new group of voting members that did not have a vote last year.
(3) Domestic Flavor: The market will of course focus on Big Jobs Friday where we get our Average Hourly Wages (currently up 2.9% YOY), Non-Farm Payrolls and the Unemployment Rate (currently 4.7%). But there are plenty of other big name releases this week with the gravitas to move pricing. These include Chicago PMI, ISM Manufacturing and ISM Services.
Across the Pond
The Bank of Japan will issue their policy statement, interest rate decision and economic forecast on Tuesday.
China starts out the week with their Chinese New Year but Wednesday will be a very important data set with both Manufacturing and Services PMI.
The Bank of England will have their policy statement, interest rate decision and Minutes on Thursday.
It was a nice and boring session. The economic data was right in the wheelhouse of expectations and didn’t have an impact on pricing. Nothing really new or shocking came out of Trump’s mouth to cause MBS to fluctuate.
Personal Income and Outlays: Personal Spending in December rose more than expectations (0.5% vs estimates of 0.4%) and was a nice improvement over November’s pace of 0.2%. Most of that gain was due to strong durable goods (autos). Personal Income was a little lighter than expected (0.3% vs estimates of 0.4%) but November was revised higher from 0.0% to 0.1%, so without that revision, the reading would have matched expectations for December.
Inflation did tick upward as focus is on the Core PCE YOY reading which moved up to 1.7% from November’s 1.6%. Still shy of the Fed’s target rate of 2.0% but it is marching towards it bit-by-bit.
Housing: The NAR’s Index for Pending Home Sales increased by 1.6% in December which is higher than the 1.1% forecast.
Manufacturing: The Dallas Fed published its Texas Manufacturing Business Survey Index and it jumped up from November’s reading of 15.5 to 22.1 in December.
On Deck for Tomorrow: Employment Cost Index, Case-Shiller Home Price Index, Chicago PMI and Consumer Confidence.
While the press, etc., go crazy over Trump’s immigration orders, he signed another one today designed to help small businesses by cutting regulations. Now, each department that wants to enact a new regulation must show how two existing regulations will be removed.