What happened last week?
Mortgage backed securities (MBS) lost 71 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week. Over the past two weeks, MBS have lost 161 basis points which have driven mortgage rates to their highest levels in four years.
The bond market (which controls mortgage rates) continued to shift risk from a 50% probability of a rate hike by the Federal Reserve in March three weeks ago, to a 75% probability two weeks ago, to almost 100% last week. That shift in sentiment among long bond traders is the primary factor in rates right now.
Last week, the focus of the markets was on two major events: the European Central Bank (ECB) and our Jobs data.
Jobs, Jobs, Jobs
Friday’s jobs data was strong enough to solidify market bias towards a March rate hike.
The following is the Tale of the Tape:
February Non-Farm Payrolls (NFP) 235K vs estimates of 190K.
January NFP revised upward from 227K to 238K.
December NFP revised lower from 157K to 155K.
Three month rolling average increased to 209K.
Average Hourly Wages increased on MOM basis by 0.2% vs estimates of 0.3%. However, January was revised upward from 0.1% to 0.2%, so the baseline changed, which means Average Hourly Wages matched expectations. On a YOY basis, wages jumped from January’s reading of 2.5% to 2.8% this reading.
The Unemployment Rate dropped from 4.8% to 4.7% which matched expectations. But it did so with the Participation Rate rising (which is usually not the case). It rose from 62.9% to 63.0%.
European Central Bank
They left their key interest rate unchanged and did not change the level of their bond purchasing program. ECB President Draghi said the “balance of risks to growth has improved” and noted that The ECB had “removed reference to signal a sense of urgency.” This combined with the removal of references to the use of all instruments has sparked EUR strength and Bund weakness.
What’s on the agenda for this week?
The week with a “yawner” as there were no major economic releases today. So, there should be some small downward pressure in the -12 to -21BPS range. The ONLY way MBS can improve is IF the Fed does not raise interest rates and their dot plot chart drops from the 3+ hikes that it showed in December to 1-2…and that simply is not very likely. This could be a very ugly week for MBS.
The three areas that have the greatest ability to directly impact back-end pricing this week are: (1) The Talking Fed, (2) Across the Pond and (3) Domestic Flavor.
(1) The Talking Fed: The much anticipated March FOMC meeting will conclude Wednesday at 2:00EDT. The Fed has done everything that it could over the past month to move the markets to expect a rate hike. Assuming that they do raise rates 1/4 point, there is still much that they can do to impact MBS pricing. First, in this meeting their economic projections will include the famous “dot plot chart.” This chart showed at least 3 rate hikes in 2017 the last time it was released but it took until last week for the market to finally believe them. Will this new dot plot chart show 4 hikes? Will it show more in 2018?
Also, Fed Chair Janet Yellen will hold a live press conference, and her responses to live questions can really move pricing. MBS will also be EXTREMELY sensitive to any discussion or mention of the FOMC looking into or considering a timeline to slow the rate of MBS purchases.
(2) Across the Pond: There are several key events that can impact demand for MBS. Just one day after the FOMC has their moment in the sun, the Bank of Japan’s Central Bank will issue their rate decision and policy statement. They currently have a negative rate (-0.10). Will they move that back to at least zero? A few of their members have already suggested slowing the pace (tapering) their QE.
There will also be very key economic releases out of China (Retail Sales, Industrial Production), Germany (CPI), the Eurozone (CPI, Unemployment), and Great Britain (Central Bank interest rate and policy statement).
(3) Domestic Flavor: There is a very large plate of heady economic data to absorb this week with Retail Sales, Inflation (PPI and CPI), Manufacturing data (Empire, Philly Fed, Industrial Production) and Consumer Confidence.
There are no major Treasury auctions this week, but they haven’t influenced MBS in a while anyway.
Oil will continue to be closely watched as the slide below $50 has actually helped MBS pricing, meaning MBS would have sold off even more if it were not for falling WTI Oil prices last week.
Experts expected a downside of only -21 BPS but they ended up much worse than that. There were no domestic or foreign economic releases of consequence today to move pricing. MBS sold off for two reasons: (1) positioning ahead of Wednesday’s FOMC meeting and (2) rising yields in the German Bund due to concerns overseas of rising inflation and growth, and what that would mean for ECB asset purchases.