What happened yesterday?
Mortgage backed securities (MBS) lost 12 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
MBS traded in a very tight range and were under steady pressure. There would have been even worse pricing for the week but traders were temporarily “parking” their cash in bonds over the long holiday weekend. There was fairly strong economic data and the Fed attempted to get the markets to price in a March rate hike.
There was another round of data that shows that inflation is showing up. The Core YOY (year over year) Consumer Price Index increased to 2.3%, well above the Fed’s target rate of 2.0%. Even though the Fed is generally referring to the Core PCE for its inflation target, this is still a comprehensive report that is above 2.0%. The Headline CPI MOM (month over month) was double the market expectations (0.6% vs estimates of 0.3%) and the Core CPI MOM came in at 0.3% vs estimates of 0.2%.
The Atlanta Federal Reserve District Business Inflation Expectations came in at 2.0%, also supporting inflation hitting the Feds’ target rate soon.
The biggest report of the week was very robust. Retail Sales Ex-Autos jumped 0.8% which was double the market expectations of 0.4%. Plus December was revised upward significantly from 0.2% to 0.4%. When you look at the headline reading which includes Autos, Retail Sales came in four times higher than expectations (0.4% vs estimates of 0.1%), plus December was revised upward from 0.6% to 1.0%.
Jobs, Jobs, Jobs
Initial Weekly Jobless Claims were lower than expected (239K vs estimates of 245K) and last week’s 234K reading was not a fluke but stood. The more closely watched 4 week moving average hit another historic low…hitting the lowest reading since this data has been tracked starting in 1973. It fell to 244,250.
Philly Fed: Their General Business Conditions Index Survey shot up dramatically, hitting 43.3 vs estimates of 17.5. It’s the strongest reading since 1983…this is Reaganesque.
Federal Reserve Chair Janet Yellen gave her semi-annual testimony in front of the Senate Banking Committee and the House Financial Services Committee (you can read her testimony here). She said that waiting too long to raise interest rates would be “unwise” as economic growth continues and inflation rises. Basically she put the markets on notice that the March meeting is indeed live.
The Fed’s number two, Vice Chair Stanley Fischer, said that they are nearing its dual goals and seems to be headed for its anticipated monetary policy path, which officials’ December projections put at three increases this year. He said, “I don’t want to give you numbers on two or three, but this is consistent with what we had thought should be happening around now — that is that we’d be moving closer to the 2 percent inflation rate, and that the labor market would continue to strengthen.”
Boston Fed President Eric Rosengren said that while the Fed does track market expectations, they do not dictate what and when the Fed acts. He said “market skepticism” about a rate hike in March is not warranted and should treat this as a live meeting.
What’s on the agenda for this week?
For the week, expect both terrific overhead resistance and support which will keep MBS moving sideways but there are a few events that can move MBS…and if anything…those three things point to pressure on MBS. This is not a week to float.
The three areas that have the greatest ability to impact pricing this week are: (1) Taxes?, (2) The Talking Fed and (3) Across the pond.
(1) Taxes? President Trump said 2 weeks ago that we would see a major corporate and personal tax rate announcement in “2 or 3 weeks”. And that was before Steven Mnuchin was confirmed as Treasury Secretary. Any tax plan would have to come from his office. Now that he is in his second week, will we finally get a tax plan? If so, any cut in taxes will pressure MBS.
(2) The Talking Fed: Last week, there is no question that Yellen, Fischer, et al made a concerted effort to make the markets think that March was a “live” meeting (even though there is no press conference). This week will be the minutes from their last Fed meeting but also a slew of speeches this week.
02/21 Neel Kashkari, Patrick Harker and John Williams
02/22 Jerome Powell, Fed Minutes
02/23 Dennis Lockhart
(3) Across the pond: There will be a bunch of inflationary, manufacturing and services data this week as well as market reaction to polling data out of France, Germany and a few others.
02/21 2 year note
02/22 5 year note
02/23 7 year note
As expected, MBS were trapped in a very tight range. There were no major economic reports and only a short term Treasury auction today. MBS started down -16BPs as traders removed their funds parked over the weekend but there were no major moves in reaction to the day’s events. Two voting Fed members have completely different views on rate hikes today and the market is confused.
Treasury Auction: The 2 year auction sold $26B at a high yield of 1.230%. It was a very strong auction with a bid-to-cover ratio of 2.82 which is the highest demand since August. But this is too short of a term note to impact the longer end of bond yields.
On Deck for Tomorrow: 5 year Treasury auction, FOMC Minutes and Existing Home Sales.
The Talking Fed
Minneapolis Fed President Neel Kashkari (new voting member this year) said that the labor market still had some “room to run” and inferred that he wants to be cautious with raising rates as he does not want to hurt the growth rates of the labor market.
Philly Fed President Patrick Harker (voting member) was more hawkish in tone, saying that “Given the state of the economy, more or less back to normal, I continue to see three modest rate hikes of 25 basis points each as appropriate for 2017, assuming things stay on track,”
SF Fed President John Williams (non-voting member) addressed global financial stability and voiced his concern that persistent low rates and policies leave no room for Central Banks to react to any downturn in the economy.