What happened last week?
Overview
Mortgage backed securities (MBS) gained just 10 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. While just a 10 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 -74 BPS from highs (lowest rates) to lows (highest rates).
The MBS market attempted to make two solid runs towards higher prices (lower mortgage rates), testing and even trading above a very important technical resistance level at the 50 day moving average. But by the end of every trading session, MBS moved lower and closed back below that resistance level.
The two biggest economic events were the Federal Reserve Open Market Committee’s inaction and Friday’s Jobs data. MBS had a very large positive (lower rates) reaction to the jobs data but lost those gains in response to the Trump Administration’s targeting Dodd-Frank to reduce regulation which would be a positive for economic growth and therefore negative for rates.
Domestic Flavor
Jobs, Jobs, Jobs: Here is the tale of the tape from Big Jobs Friday:
– Headline: January Non-Farm Payrolls 227K vs estimates of 175K.
– December NFP revised from 156K to 157K.
– November NFP revised from 204K down to 164K.
– Over the past 3 months, NFP have averaged 183K after revisions.
– The Unemployment Rate moved up from 4.7% to 4.8%.
– This was due to the Participation Rate moving up from 62.7% to 62.9% which that more people responded that they are looking for work compared to last month.
– Average Hourly Earnings did increase on a MOM basis by 0.1% but this was lower than the estimates of 0.2%.
– Average Hourly Earnings on a YOY basis dropped from 2.9% (revised to 2.7%) down to 2.5%.
– The average work week increased to 34.4 hours from 34.3 hours.
So, what does all of that mean? Well for sure it is a mixed bag. There were much stronger NFP readings but there was a sizeable revision lower in November’s NFP. There was also an increase in wages but at a very slow clip.
The Talking Feds: They released their Interest Rate Decision and Policy Statement on Wednesday. They kept their key interest rate unchanged with a range of 0.500 to 0.750 percent. While many of the pundits consider this a quasi-dovish policy statement, it actually is not. You can read the official release here.
Here are some key points:
– They did not make any changes nor hint at future discussions regarding the current pace of asset purchases (MBS).
– There were four new voting members this time around and it was a unanimous vote.
– Added new language “measures of consumer and business sentiment have improved of late.”
– Said near term risks are “roughly balanced.”
– Made a change from their prior statements of “inflation is expected to rise” to “inflation WILL rise.”
– Last time they mentioned uncertainty around fiscal policy and this time they made no mention of it…which is strange.
– Mentioned overall strength in the labor sector and in spending.
Services: Tw0-thirds (or more) of our economy is non-manufacturing based. The January ISM reading hit 56.5 which just missed expectations of 57.0. It was the third highest reading in the last 12 months. Anything above 50 is expansionary.
Productivity: The Preliminary 4th quarter Non-Farm Productivity Jumped by 1.3% which was better than the forecasts calling for 1.0% and the 3rd quarter was revised upward to 3.5%. Unit Labor Costs did increase again, this time 1.7% which was a little lower than market expectations of 1.9%. Bonds love a strong Productivity report.
Factory Orders: December U.S. Factory Orders where better than expected (1.3% vs estimates of 1.0%) and a nice rebound from November’s -2.4%.
What’s on the agenda for this week?
Overview
There is really nothing domestically (economic report wise) that has the gravitas to materially impact pricing. The “three things” are very important to pricing though. While the 50 day has held since October 2016, the Danger Zone that resides just above it is still very real and not to be messed with.
Three Things
The three biggest events that have the highest potential to impact back end pricing this week are: (1) Trump, (2) The Talking Fed and (3) Across the Pond.
(1) President Trump: On Friday, MBS sold off from their intra-highs after Trump signed an executive order that addressed part of Dodd-Frank. It was reported that part of that order pushed back the implementation of the fiduciary responsibility clause, which was supposed to start in April, back 180 days for review. However, on Monday MBS rallied in early trading as it was discovered that the delay was in earlier versions of the memo and not in the final memo signed by Trump. This just illustrates the point that his administration’s actions have more of an impact on long bonds than anything else. The bond market is still waiting to see what kind (if any) financial stimulus will be proposed and we still don’t have any official proposal on tax reform. If we get any real movement on any of those two, it will have a big impact on pricing.
(2) The Talking Feds: Last week, there was a fairly “hawkish” policy statement but no real action. The bond market currently has a very low probability priced into the Fed’s March meeting for a rate hike but this week’s slew of talking Feds could change that.
– 02/06 Patrick Harker
– 02/09 James Bullard, Charles Evans
(3) Across the Pond:
European Central Bank: President Mario Draghi spoke this morning and confirmed that there will be no changes to their economic policy in the near future and attempted to talk up the market saying that currency values are in line with asset and equity fundamentals.
China: There will be very important Import and Exports data as well as their Caixin Services PMI data.
Japan: There will be their Trade Balance data as well as the Bank of Japan’s Summary of Opinions.
Treasury Auctions this Week
02/07 3 year note
02/08 10 year note
02/09 30 year bond
Market Wrap-up
Domestic Flavor
Jobs, Jobs, Jobs: There was only one lower-level economic report today. The newly created Labor Market Conditions Index for January came in at 1.3. December was revised from -0.3 to +0.6.
On Deck for Tomorrow: 3 Year Treasury auction, JOLTS and Consumer Credit.
Across the Pond
China: Caixin Services PMI hit 53.1, just off of last month’s pace of 53.4. Any reading above 50 is expansionary, a reading above 53 is very strong and pro-growth.
Germany: Factory Orders in December were much hotter than estimates (5.2% vs estimates of 0.5%).