What happened last week?
Mortgage backed securities (MBS) gained 22 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. It was another “choppy” week as there was a -83BPS move from best pricing levels of the week (lowest rates) to worst pricing levels of the week (highest rates). Compare that to a -74BPS swing the prior week and -96BPS the week before that and you see that the bond market has been very volatile.
It was a very light week for economic data. There were important 10 year and 30 year Treasury auctions but neither had any significant influence over MBS pricing.
Inflation? Maybe. Import Prices jumped 0.4% in December which was double the market expectations of 0.2%. Year-over-year (YOY) Import Prices jumped 3.7% which was a huge uptick from November’s YOY reading of 1.8%.
Consumer Sentiment: The preliminary February reading came in at 95.7 which is a good reading but it was certainly lower than market expectations of 97.9 and a large drop from January’s uber-high 98.5.
President Trump said that he can now support a “one China” policy which is causing long bond traders to ease up a bit on concerns over a major trade war. The bond market also focused on his statement that we can expect a major announcement (finally) regarding tax reform/rates in “2 to 3 weeks” during a meeting with airline executives.
The Talking Fed
Federal Reserve Governor Daniel Tarullo resigned effective in April. This was unexpected and he was a leader in the regulatory side. However, this is welcome news as he was one of the “enablers” on the Board of Governors and bond traders see it as a potential positive towards the administration’s movement to lower regulations.
St. Louis Fed President James Bullard (not a voting member) said that he thinks that the Fed can keep rates relatively low for some time. He said they could leave the rates alone and instead focus on their asset reinvestment purchases as a tool to raise rates instead.
Chicago Fed President Charles Evans (voting member this year) said that he supports gradual interest rate hikes and expects an economic boost from President Trump’s planned fiscal policies.
What’s on the agenda for this week?
Each of the past three weeks, MBS have made a run higher but have pulled back (-90, -74 and -83) from those highs. So, IF MBS make a run…don’t trust it.
The three most important areas that have the greatest ability to influence MBS trades this week are: (1) President Trump, (2) The Talking Fed and (3) Domestic Flavor.
(1) President Trump: The bond market moved off of their best levels last week after he simply mentioned an announcement over tax reform over the next couple of weeks. This demonstrates the point that with reduced regulation and generally favorable policies towards economic growth, the bond market will react strongly to any details from his administration. He starts the week off meeting with the Canadian Prime Minister to discuss NAFTA further.
(2) The Talking Fed: Normally, this would be Thing 1 instead of Thing 2 but that is simply how things are right now….the President has more influence on future growth/inflation/rate expectations than Fed policy does. With Tarullo’s retirement, Trump now has the ability to nominate three vacant seats on the Federal Reserve Board of Governors, followed by Yellen in February 2018 and Fischer in June 2018. In other words, he has the ability to change 5 seats in the Fed in the near term. That means the bond market is looking at the current Fed members and saying, “Sure….but you won’t even be here next year to follow through with your policies.”
Regardless, we get a lovely Valentine’s Date with Fed Reserve Chair Janet Yellen on Tuesday as she gives her semi-annual testimony in front of the Senate.
02/13 Janet Yellen, Jeffrey Lacker, Dennis Lockhart and Robert Kaplan
02/14 Janet Yellen, Eric Rosengren
02/17 Loretta Mester
(3) Domestic Flavor: Unlike last week, there is a lot of domestic economic data to digest this week. There will be key inflation measures with both PPI and more importantly CPI. The biggest report of the week is Wednesday’s Retail Sales data.
A trend that started in the later part of 2016 is that key holders of our debt (U.S. Treasuries) have been lightening up (dumping) their positions. Why? Because they expect stronger global growth, and bonds/notes that are interest rate sensitive are not a good place to be if that is your expectation. China was the number one holder of U.S. Treasuries but sold off, making Japan the number one holder, but Japan sold off as well in December. They lowered their holdings to a level not seen since 2013. We get key TIC data this Wednesday and it could have an influence in pricing.
The stock market certainly played a role in pressuring bonds with no real economic data to trade off of today.
Geo-Political: President Trump met with Canadian Prime Minister Trudeau. Trump said that the NAFTA renegotiations had less to do with Canada and more to do with the lopsided trade with Mexico.
On Deck for Tomorrow: Valentine’s Day with Janet Yellen and PPI.