What happened last week?
Mortgage backed securities (MBS) gained 50 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
MBS (which control mortgage rates) continued to shift risk going into Wednesday’s Fed meeting which caused mortgage rates to continue the two-week trend of moving higher. But after the markets received a very “dovish” rate hike, MBS moved off of their lowest levels and regained a small portion of their losses which caused mortgage rates to level off.
The Talking Fed
The biggest event of the week was the Federal Open Market Committee (FOMC) decision to raise their key interest rate but at same time, moved to dampen market expectations over the frequency and timing of future rate hikes via Fed Chair Janet Yellen’s “dovish” stance.
The Federal Reserve Open Market Committee decided to raise their Fed Funds rate by 25 BPS which was widely expected. Here are some key points from their policy statement:
– Minneapolis Fed President Kashkari (new voting member in 2017) voted AGAINST the rate hike but he was the only one.
– Deleted the word “only” from expectation that U.S. economy to evolve in way that warrants “only gradual increases” in rates.
– Keeps reference to fed funds rates as likely to remain below long-run levels “for some time.”
– Monetary policy will support “some further strengthening” in labor market, inflation’s return to 2%.
– Now says that inflation will “stabilize around” 2% over medium term vs prior description that it would rise to 2%, now says inflation’s moving close to 2% objective.
– Fed continues to say economic activity expanded at “moderate pace.”
– U.S. labor market has continued to strengthen, and job gains are “solid.”
– FOMC keeps previous assessment that near-term risks to outlook appear “roughly balanced”; continues to say it’s “closely” monitoring inflation indicators and global economic/financial developments.
– Fed continues to say it will keep existing reinvestment policy in place until normalization of fed funds rate “is well under way.”
– FOMC’s holdings of longer-term securities to stay “at sizable levels.”
What did the “dot plot chart” say?
– Median target for end-2017 is 1.375%, unchanged
– Median target for end-2018 is 2.125%, unchanged
– Median target for end-2019 is 3% vs 2.875% in December
– Long-run target is 3%, unchanged
During her live Press Conference, Fed Chair Janet Yellen said:
– Three rate hikes in 2017 is what she calls “gradual.”
– Says the simple message is “that the economy is doing well.”
– She said in her opening remarks that this “is not a reassessment” of their stance in policy or trajectory of the economy. This is perceived as a very “dovish” statement by her.
What’s on the agenda for this week?
MBS are in a well-defined channel where MBS have attempted to make a run three times and have failed. This is due to the lack of any new “propellant.” This week’s domestic data has no ability to impact pricing. Experts will focus on the slew of Talking Feds this week with Janet Yellen taking center stage on Thursday. Look for MBS to trade in a fairly narrow and sideways range until she speaks. For MBS to make any type of run will require an even more dovish Yellen and crew (more so than last week).
The three items that have the greatest ability to influence MBS trades this week are: (1) The Talking Fed, (2) Across the Pond and (3) Domestic Flavor.
(1) The Talking Fed: After last week’s “dovish” rate hike, the market is looking for more clarity and this week has a glut of Fed Speak which includes Fed Chair Janet Yellen.
03/20 Neel Kashkari (the lone dissenting vote) and Charles Evans
03/21 Esther George, Loretta Mester and Eric Rosengren
03/23 Janet Yellan, Robert Kaplan
03/24 James Bullard and John Williams
(2) Across the Pond: The biggest news is that Great Britain will officially start Article 50 on March 29th, which will finally start the divorce process from the Eurozone and allow Great Britain to nail down some new trade agreements. However, this creates a lot of uncertainty as it has never happened before. Great Britain will no doubt end up fine but the concern is about the health and stability of the Eurozone.
There is a Eurozone Finance Ministers meeting this week which will be closely watched as well as the French elections taking center stage with the first presidential debate on Monday.
There is also heady economic data from China, Germany, Japan and several other of the top ten economies (in terms of GDP) that will hit.
(3) Domestic Flavor: It is a very light economic calendar this week and there are no Treasury auctions to digest. The only economic report of any significance is Friday’s Durable Goods Orders.