Learn from the Past
Mortgage backed securities (MBS) lost 8 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week. While a net change under -10BPS is very tame, there certainly was some “choppiness” last week with a -56BPS swing from the best levels of the week to the worst levels of the week.
It was a very volatile week as there was very encouraging economic news with very strong manufacturing, services and wages. All of which are very positive for the economy but negative for rates. On the flip side, there was heightened global concern over North Korea and a potential testing of a missile that could hit California and the tearing apart of Spain as their richest province voted, passed and declared independence from Spain. This global instability caused many to purchase long bonds and is good for rates.
Jobs, Jobs, Jobs
Big Jobs Friday hit last week, and we learned that pricing pressure in wages is very real.
Tale of the Tape:
- September Non-Farm Payrolls -33K vs estimates of 0K.
- August was revised from 156K up to 169K.
- The “whisper” numbers on Wall Street were actually at -50k, so this is actually not a shock to the system, the last time that we had a major hurricane, NFP also went negative so the markets are giving this piece of data a “pass.”
Unemployment Rate dropped down to 4.2% vs estimates of 4.4% and might have some teeth. Recently, this number has dropped along with the participation rate. But in this case the participation rate actually increased from 62.9% to 63.1%.
Wages: The MOM Average Hourly Earnings moved up by 0.5% vs estimates 0.3%, but the bond market focuses on the YOY reading which came in at 2.9% vs estimates of 2.5%. This is the highest reading since June of 2009!
Manufacturing: Just like the regional Chicago PMI report, the September ISM National Manufacturing report was much better than expected and hit its highest levels in 13 years with a 60.8 reading. New Orders rose to a 4 month high and Employment broke 60.0 for the first time in 6 1/2 years.
ISM Services: This represents over 2/3 of our economic engine. Any reading above 50.0 is very good and expansionary. The market was expecting a very high reading of 55.5 but instead we got a very robust reading of 59.8 which is one of the highest readings on record.
The Talking Fed
The Senate voted to confirm Randal Quarles as a new Federal Reserve Board Governor. He is replacing Daniel Tarullo who was the unofficial head of the banking industry and resigned in April. Quarles will now be the official Fed head of banking regulations and favors fewer of them. This is the very first run at getting a Fed member through the Senate by the Trump administration and it actually went very smoothly with a 65-32 vote. There are still two vacant Fed Board positions that were never filled during the Obama administration and Fischer (retires in October) will need to be replaced. That is three permanent voting members that will be appointed by President Trump in addition to the next Fed Chair.
What’s on the Agenda for this Week?
After the long weekend this could be very interesting week. Last week, MBS were driven all the way down to test the 200 day moving average and it held very nicely. Domestically, there really isn’t anything that can impact pricing until Wednesday’s FOMC minutes, and the other key day, Friday’s combo of CPI and Retail Sales.
The three things that can have the most impact on back end pricing this week are. (1) Geo Political, ( 2) The Talking Fed and (3) Domestic Flavor.
(1) Geo Political: There are two categories here: foreign and domestic. Across the pond the markets (and our government) are watching closely to see if North Korea will launch its latest missile. This one has more significance as it is supposed to be capable of hitting the U.S. Today, starts a national holiday in N.K. and people are concerned that the test launch will be part of the celebration. Meanwhile, Spain said it will immediately arrest the new leader of Catalonia (even issued a death threat) if they followed through with their silly insistence that they are now independent just because they had a vote and everything.
Domestically, the markets are focused on Tax Reform. The House pushed through a budget last week which moved up the prospect of Tax Reform. However, it appears that TN Senator Bob Corker (just announced early retirement from the Senate) will not support the reform measures which basically kills it. Also on the radar is President Trump’s executive order which is said to allow small businesses to pool together to purchase health insurance and to purchase it across state lines.
(2) The Talking Fed: There will be another heavy dose of speeches by key Fed members as well as the release of the minutes from the last Fed meeting.
10/10 Neel Kashkari and Robert Kaplan
10/11 Charles Evans and the FOMC Minutes
10/12 Jerome Powell and Raphael Bostic
10/13 Eric Rosengren, Charles Evans, Robert Kaplan and Jerome Powell
The bond market is very focused on the “Game of Thrones” as President Trump will be appointing three voting board members soon and the market will react to a change in perception of who the next Fed Chair will be.
(3) Domestic Flavor: We have a holiday-shortened week that is loaded on the back end with some big name economic reports. The bond market will focus on Thursday’s PPI and Friday’s CPI as key measures of inflation. Friday’s Retail Sales will also be a driving force.
Treasury Auctions This Week
10/11 10 year note
10/12 30 year bond
It was fairly quiet today. There were no major economic releases.
NFIB: The National Federation of Independent Business’s Small Business Optimism Index for September came in at 103.0 vs estimates of 105.0. The drop from August (105.3) is due to sales expectations decreasing due to the hurricanes.
On Deck for Tomorrow: Mortgage Applications, JOLTS, 10 year note auction and the minutes from the last FOMC meeting.
Across the Pond
(s)Pain: The Catalan President Puigdemont danced around “words” and came just short of declaring full independence from Spain. He instead declared “Catalonia has declared deferred independence.”