What happened last week?
Mortgage backed securities (MBS) lost -5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
It was a very light week for domestic economic data and the data that was released had no impact on mortgage rates as the bond market continued to focus on geo-political events overseas, most notably the French elections and trouble with North Korea. Both events caused MBS pricing to remain at elevated levels but they simply plateaued on Tuesday (lowest rates of the week) and then began to “normalize” from those lofty levels.
The Talking Fed
Last week, the Federal Reserve continued to remind the marketplace that there are another two rate hikes on tap this year and that they would begin to purchase less MBS and Treasuries by the end of the year. Both are very negative for rates. However, the bond market quite simply isn’t buying into their sentiment yet with less than a 50% chance of even one more rate hike this year currently priced in.
The Fed issued their Beige Book on Wednesday. This is prepared so that all the committee members can get a good understanding on how the 12 districts are doing and is to be used in their discussions for their May 2-3 policy meeting. You can read the official release here. Some highlights:
- It showed that economic activity increased in ALL 12 districts and was fairly positive as the economy expanded at a modest-to-moderate pace between mid-February and the end of March, but inflation pressures remained in check.
- Boston Fed President Eric Rosengren said the Fed should begin shedding its bond holdings soon but do so in a very gradual way that has little effect on its planned interest rate hikes. He also said that using the balance sheet will become a more used tool by the Fed during the next recession.
- Kansas City Fed President Esther George (non-voting member now but in 2016 voted twice to raise rates) said that she supports the prompt and gradual process of paring some of the central bank’s $4.5 trillion in assets. She added that it should be done “on autopilot,” and not adjusted in reaction to short-term economic data, and that there may be “some tradeoff” with the Fed’s parallel plan to raise rates about three times per year.
What’s on the agenda for this week?
The day started with a slight pull-back in pricing due to the results of the French elections on Sunday which has calmed the markets; and therefore, some of that fear factor cash that was moved into bonds is flowing back into stocks. With nothing else on the radar today, MBS will see some small losses but will have terrific support at the 100 day moving average. For the week, there are a lot of moving parts and wildcards. The bond market is priced for failure: failure to get taxes done, failure to keep the government open, failure of the ECB to make any changes to policy and a failure of our GDP to show any strength this week. Therefore…if that is what we end up getting, there is not upside as it is priced in. Which means the downside is more glaring here. If we do get something on taxes on Wednesday, if we do get a debt ceiling passed, if we do get a stronger than expected GDP release, then MBS will make another move lower into a lower channel.
The three areas that have the greatest potential to impact pricing this week are: (1) Central Bank Palooza, (2) U.S. Politics and (3) Domestic Flavor.
(1) Central Bank Palooza: The focus will be on Thursday as hear from both the Bank of Japan and the European Central Bank. From the ECB side, we want to know more about the amounts and timing of their reduced monthly bond purchases (started in March). Also, their economic data has been very strong as of late and it will be interesting to hear how President Mario Draghi addresses future rate plans. For the BofJ, we will be looking to see if they move off of their negative interest rate position.
(2) U.S. Politics: As Congress returns from a two week break, it’s “game on” this week. Of note is Wednesday’s announcement from President Trump on some more details of his proposed tax levels. The administration has walked backed expectations on the level of detail that will be in this announcement but any clarity on what he is going to push through could have a big impact on pricing. We also are facing yet another government shutdown deadline on Saturday which is also his 100th day in office. Defunding of Obamacare and budget changes will be key negotiations this week. And of course during all of this, it appears that they are getting prepared to make another run at healthcare reform.
(3) Domestic Flavor: This week there will be some heady economic releases that for a change could actually influence back-end pricing. The focus will be on Thursday’s Durable Goods Orders Ex-Transports as a proxy for business/capital spending. Next up will be Friday’s GDP data where we get a first look at the first quarter GDP.
Treasury Auctions This Week
04/25 2 year note
04/26 5 year note
04/27 7 year note
The Talking Fed
We hear from Neel Kashkari (yet again) and then we enter the “blackout period” where the Fed is prohibited from speaking until the May 2-3 FOMC meeting.
It was a fairly quiet day. MBS started the day under a little pressure (due to the French election results) but hung in the channel nicely. There were no major economic events to move pricing today.
Dallas Fed: Their April Manufacturing Survey continues to show strength with a 15.4 reading. All the internals looked good; costs are rising but at a slower pace than last month and new orders are strong.
On Deck for Tomorrow: 2 year note auction, Case Shiller Home Price Index, New Home Sales, Richmond Fed and Consumer Confidence.
Across the Pond
Japan: Their February Leading Economic Indicators came in at 104.8 vs 104.7 in January.