What happened last week?
Overview
Mortgage backed securities (MBS) gained 56 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
It was a holiday-shortened week with really only three full trading sessions as the bond market closed early on Thursday. The name of the game last week was Fear.
Geopolitical
Geopolitical events and concern drove cash into the safety of U.S. bonds last week and that swell of demand was the primary driver for pushing mortgage rates down.
France: Presidential debates and polling data continue to show three front runners. The problem is that two of those are very vocal about France leaving the European Union. In short, investors overseas are unsure how the election will pan out and if there will be a “Frexit” similar to the “Brexit” which is ongoing with Great Britain. This would obviously cause a great deal of instability to the European union.
Russia: Tensions have been rising for months for a variety of reasons but the recent air strike by the U.S. on a Syrian air base has Russia sending more defensive missiles and ships to the region.
North Korea: This impacts bonds on many fronts. Certainly, the escalating “saber rattling” by the North Koreans and the seemingly endless missile tests are of concern but more so is the relationship between the U.S. and China as we try to press them to handle North Korea while at the same time, hammer out important trade agreements.
What’s on the agenda for this week?
Overview
MBS will continue to trade at very “elevated” levels as the bond market has shifted to a safety/protection mode where economic data is not germane. While pricing will be great, further upward moves into the “stratosphere” of MBS pricing will be hard to come by as they are overbought at this point.
Three Things
The three areas that have the greatest ability to impact back-end pricing this week are. (1) Geopolitical Fear, (2) The Talking Fed and (3) Domestic Flavor.
(1) Geopolitical Fear: This will be the primary factor in all pricing this week. This week will be dominated by the first round of the French presidential election on Sunday. With the number of undecided voters remaining high, four candidates look set to fight for the two places in the second round on 7 May. The polling data leading up to Sunday will have a large impact on pricing. China, North Korea, Russia, Syria, Iran and Afghanistan will continue to also drive fear in the bond market as well.
(2) The Talking Fed: The “data dependent” Fed continues to tell the market that we should expect 2 more hikes this year and be prepared for few Treasury and MBS purchases by year end. But the markets are not listening as they currently barely even have one more rate hike priced in.
04/17 Vice Chair Stanley Fischer
04/18 Esther George
04/19 Fed’s Beige Book and Eric Rosengren
04/20 Jerome Powell
04/21 Neel Kashkari
(3) Domestic Flavor: Actually our economic calendar is very light this week without a single report that has the gravitas to cause MBS to make a major move. There will be a large dose of Housing news with Home Builder’s Sentiment, Housing Starts and Building Permits, Weekly Mortgage Applications and Existing Home Sales.
Market Wrap-up
Overview
It was a quiet day to the start of the week. Domestically, there were low level economic reports. The strong Chinese data was offset by the overall market fear over France, Korea, etc. But MBS have traded at very elevated levels…but it is just too difficult for any meaningful gains at this point until one of the global situations deteriorates.
Domestic Flavor
Empire State: Their production and sentiment reading was lower than expected in April (5.6 vs estimates of 13.0). But this regional report is not a bellwether for the U.S.
Home Builder’s Sentiment: The NAHB Index was very robust at 68; any reading above 50 is positive. This is a small pull-back from March’s record reading of 71.
On Deck for Tomorrow: Industrial Production and Capacity Utilization, Housing Starts and Building Permits and Esther Georg.
Geo-Political
The U.S. is sending more aircraft carriers to South Korea which brings the total to 3.
Across the Pond
China: Retail Sales moved from 9.5% in January to up 10.9% (YOY) and their 1st quarter GDP reading of YOY 6.9% (1.3% QOQ) is its fastest pace in a year and a half.