What happened last week?
Overview
Mortgage backed securities (MBS) gained 41 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
It was a very light week for domestic economic data. The bond market (which controls mortgage rates) focused on the slew of speeches by Federal Reserve presidents and board members. MBS drifted upward as President Trump could not get any changes to the healthcare law through the House last week. This has traders concerned that he may face the same resistance with corporate and personal tax reform. Both are considered very stimulative for our economy.
Domestic Flavor
Durable Goods Orders: The headline reading rose by 1.7% in February which beat out forecasts of 1.2%. Plus, January was revised upward to 2.3%. When you strip out the very volatile Transportation sector, Durable Goods rose by 0.5% vs 0.6% and January was revised upward from -0.2% to 0.2%. Overall a pretty good report. The only real weakness was with core capital goods that missed the mark (-0.1 vs estimates of 0.5) but January was revised upward from -0.4 to +0.1…so that makes up the difference there.
The Talking Fed
Fed Chair Janet Yellen spoke in Washington at a conference this morning. She did not address the pace of future rate hikes or even our economic trajectory but remained on topic for the conference which was “The Economic Future of Kids and Communities.”
Chicago Fed President Charles Evans (voting member) did the same thing as Yellen yesterday and did not address rates or the economy in his address to a child education conference. But he did say at a different setting that the Fed is now going to wait until June before it considers its next rate hike.
S.F. Fed President John Williams (non-voting member) said, “Three or even four increases as your total makes sense,” indicating the economy is growing at a strong enough pace to support at least three rate increases this year.
St. Louis Fed President James Bullard (non-voting member) said that the Fed should keep its policy rates low but should instead trim their balance sheet (which would mean less MBS purchases and therefore cause mortgage rates to rise without the Fed having to raise their Fed fund rate).
New York Fed President William Dudley (voting member) said that the economy is “at a pretty good pace right now.” He said the Unemployment Rate could drop lower but then that brings up concern over wage inflation.
Cleveland Fed President Loretta Mester (non-voting member) said that she sees MORE than three rate hikes this year. “I actually built into my forecast more than three as I have the economy a bit stronger than the median forecast.” This is no surprise as she voted three times in 2016 to raise rates (rates were only actually raised once in December).
What’s on the agenda for this week?
Overview
MBS are expected to continue to trade at “elevated” levels this week. Now that they are trading at the upper most part of the channel, you will see great pricing today. For this week, MBS will bounce around this channel. The only thing that can break it below it is if there is some movement in the Trump Tax reform and/or PCE climbing higher on Friday.
Three Things
The Three Things that have the greatest ability to impact pricing this week are: (1) Trump and taxes, (2) The Talking Fed and (3) Personal Consumption Expenditures.
(1) Trump and Taxes: Healthcare reform was an epic fail. The concept of a Republican controlled White House, Senate and House rubber stamping legislation and pushing through needed changes is narrowing and has traders walking back their expectations of regulatory reform, tax reform and infrastructure spending. This week, there will be a lot of talk regarding tax reform…IF it appears that it is going to be the same as healthcare, then MBS will continue to see support. IF it appears that it will move through the House, then MBS will sell off.
(2) The Talking Fed: This is another big week in terms of the number of speeches:
03/27 Charles Evans, Dennis Kaplan
03/29 Eric Rosengren and John Williams
03/30 Loretta Mester, Dennis Kaplan and William Dudley
03/31 Neel Kashkari and James Bullard
(3) Personal Consumption Expenditures (PCE): The most important domestic economic release this week won’t hit until Friday. The PCE release is what the Fed looks at when they say they have a target rate of inflation of 2%. They look at the YOY (year-over-year) reading and not the monthly reading. Last time, the YOY reading was at 1.9%. This report will also contain important Personal Income and Spending data.
Treasury Auctions this Week
03/27 2 year note
03/28 5 year note
03/29 7 year note
Market Wrap-up
Overview
As expected, MBS had some very small gains. Generally, there are very small improvements in pricing once they get past +21 BPS….and they basically hovered at that level all day. The 2 year note auction had no impact on MBS trades and there were no major economic releases today.
The Talking Fed
Chicago Fed President Charles Evans (voting member) said that “Inflation is well under way toward our 2 percent target,” but that “I’d like to see it happen a little bit sooner than many forecast. I still worry that long term inflation expectations are running below our 2 percent inflation objective.” He said he did not expect core inflation, which strips out volatile elements like energy prices, would reach the 2 percent target until 2019.
Domestic Flavor
Treasury Auction: Three days of dumping short-term debt into the market place kicked off with today’s 2 year note. $26B went off a high yield of 1.261%. That is the highest rate on a 2 year term since December. Demand was strong with a bid-to-cover ratio of 2.73.
On Deck for Tomorrow: Consumer Confidence, Case-Shiller Home Price Index, Richmond Fed, 5 year Treasury auction.