Learn from the Past
Mortgage backed securities (MBS) lost 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week. There was some “choppiness” on Wednesday which produced both the lowest and highest rates of the week with an intra-day swing of -37BPS.
MBS were pushed into a very well-defined trading channel. The biggest event/story of the week by far was the Fed meeting and their announcement that they would begin purchasing fewer Treasury Notes and Agency Mortgage Backed Securities beginning in October.
The Talking Fed
As widely expected, the Federal Reserve kept their key Fed Funding Rate at the 1.00-1.25% range. And as widely expected, they gave us some information about their “taper.” What was not widely expected was that it would start in October instead of December/January and the vast majority of Federal Reserve members are telling the markets that they expect one more rate hike in December.
Guidance on Rates: The vast majority of the Fed is saying that they internally expect to see one more rate hike in 2017 and at least three rate hikes in 2018. None of these were priced into the market before Wednesday and in fact are still not fully priced in yet, although the market is showing at least some higher odds of a rate hike in December.
Time to Taper: They will begin to purchase fewer U.S. Treasury notes and longer term Agency MBS bonds beginning in October.
You can read their official taper policy here.
- They will purchase $10B fewer notes and bonds for October, November and December 2017.
- Of that $10B reduction, $6B will be in U.S. Treasuries and $4B will be in MBS.
- They will purchase $20B fewer notes and bonds (taking another $10B from their prior reduction) beginning in January 2018 and will continue through March 2018. It will be $12B fewer Treasury Notes and $8B fewer MBS than at today’s levels.
- This pattern will continue to reduce their asset purchase/reinvestments by additional $10B a month every quarter until it gets to a point where they have reduced it by $50B per month and then will continue at that level.
What’s on the Agenda for this Week?
This is a very robust week with a huge plate of important speeches by the Fed’s top 3 (Yellen, Fischer and Dudley) as well as big economic data which includes Friday’s PCE (inflation) reading.
The three areas that have the greatest ability to impact pricing this week are: (1) the Talking Fed, (2) Domestic Flavor and (3) Geo-Political.
(1) The Talking Fed: This week may have a more robust schedule than last week. The only difference is that there is not an official policy release.
- 09/25 William Dudley, Charles Evans and Neel Kashkari
- 09/26 Janet Yellen, Charles Evans, Loretta Mester and Raphael Bostic
- 09/27 James Bullard and Eric Rosengren
- 09/28 Esther George and Stanley Fischer
- 09/29 Patrick Harker
The bond market will be paying close attention to these speeches. The more “hawkish” tone that key members have, the worse it is for bond prices.
(2) Domestic Flavor: It’s been awhile since this category has been in the top two. But this is a very robust week for economic data. Bond traders will be paying very close attention to the 3rd release (2nd revision) of the 2nd quarter GDP which came in at 3.0% last time around. There will also be an important inflationary reading with Core PCE YOY. Manufacturing will get a lot of attention with the Chicago PMI release and we will get a good read on the consumer with both Consumer Confidence and Consumer Sentiment.
There are two big domestic issues as the Senate attempts to yet again make a run at Obamacare. There will also be a big release of what exactly is being proposed on corporate and personal tax reform.
(3) Geo-Political: Germany has re-elected Angela Merkel as their PM; however, she now has at least four different political parties in her government when they are used to only two. This will dramatically change policy moving forward as the two newer elected groups are more conservative in nature and could have an impact on Brexit talks, ECB Policy and more.
And of course, North Korea and the potential instability between U.S., China and Japan (number 1, 2 and 3 economic powers) will once again be a huge focus.
Treasury Auctions This Week
- 09/26 2 year note
- 09/27 5 year note
- 09/28 7 year note
Housing Data This Week
These reports do not impact pricing but they are important to the mortgage industry.
- 09/26 Case-Shiller Home Price Index
- 09/27 Weekly Mortgage Applications, Pending Home Sales.
MBS got to the +21BPS level at 11:20 EDT, and have since pulled back -11BPS as the ceiling of resistance is just too strong. There was no major economic data today and there seemed to be a mixed message from two voting Fed members today (one appears to favor rate hikes and one wants to wait longer).
The Talking Fed:
NY Fed President William Dudley (voting member) supported moving rates away from accommodative levels. He said, “With a firmer import price trend and the fading of effects from a number of temporary, idiosyncratic factors, expect inflation will rise and stabilize around the (Fed‘s) 2 percent objective over the medium term.” Then he said that “In response, the Federal Reserve will likely continue to remove monetary policy accommodation gradually.” The end game is that the Fed wants to have some dry powder for the next financial downturn: “By the time that the next recession hits interest rates will be considerably higher than what they are, so I think we’ll have more room.”
Chicago Fed President Charles Evans said, “We need to see clear signs of building wage and price pressures before taking the next step in removing accommodation,” before raising rates again.
Things That Make You Say “Hmmm”:
The Dallas Fed Manufacturing Survey shot up to its highest levels in 7 years hitting 21.3 vs estimates of 12.0. This is a very strong reading but it’s right after Harvey hit. Many survey respondents cited damaged assets and displaced workers as headwinds. I guess they expect that the Hurricane rebuild will provide upward momentum.
The Senate began hearings on the newly-new version of the Graham-Cassidy plan (Obamacare repeal). It still looks tight/doubtful with Sen. Ted Cruz joining the “no” vote group.
On Deck for Tomorrow: Janet Yellen, Case Shiller, New Home Sales , Consumer Confidence and our 2 year Treasury Note auction.
Japan: President Abe has decided to hold snap elections in October in an attempt to clean up a slate and push his spending bill through. This same maneuver did not go well for Britain’s PM May…she won but lost seats in their parliament.