Learn from the Past
Overview
Mortgage backed securities (MBS) gained 24 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower from the prior week.
It was a holiday shortened week. Overall, the limited economic data that hit the markets was fairly strong but Friday’ Consumer Price Index showed that core prices (ex the volatile food and energy categories) rose at only 1.7% which is well below the Fed’s target inflation rate of 2.0%. This pushed MBS to their highest levels of the week which means that we saw the lowest mortgage rates of the week right after that report.
Economic Data
Inflation? The Core (ex-food and energy) CPI for September matched the same pace as August which was 1.7%. The market was expecting a slight increase to 1.8%. The headline CPI hit 2.2% which was a good increase from August’s pace of 1.9%. But the bottom line is that the core number is still well below 2% which is favorable to bonds.
Retail Sales: Showed some very solid gains with the ex-Autos number jumping by 1.0% vs estimates of only 0.3%. However, much of the spike is contributed to buying supplies, etc., due to rebuilding from the hurricanes. Headline Retail Sales which includes Autos increased by 1.6% vs estimates of 1.7%, a slight miss but a big pick up from August’s pace of -0.1%.
Consumer Sentiment: Wow! The September data never really showed any type of dip due to the hurricanes and now the preliminary October data is off the charts with a triple digit reading of 101.1 which is the highest reading in 10 years.
Jobs, Jobs, Jobs: The August Job Openings and Labor Turnover Survey (JOLTS) showed a very large amount of unfilled jobs just waiting for skilled workers and hit 6.082M which is a very slight pullback from July’s level of 6.140M but still just below historic highs. This basically means that the labor market will continue to tighten. With an Unemployment Rate of only 4.2%, we have a tremendous amount of open jobs and the only way to fill them will be to pilfer employees from a competitor…and in the process pay up to get them to make the switch.
What’s on the Agenda for this Week?
Overview
There are no domestic economic releases that can impact pricing this week. Last week, there was room to run for some small gains because MBS were below the 100 day by enough, but this week – that is not the case. Oil will play a big role this week as it marches above $51 and with Iraqi/Kurd tensions as well as crimped supply chain issues that could rise. The higher WTI oil trades for this week…the worse it is for MBS as it will show up in inflationary data.
Three Things
The three things that have the greatest ability to impact your back end pricing this week are: (1) Geo-Political, (2) Across the Pond and (3) The Talking Fed.
(1) Geo Political: Domestically, the bond markets will continue to pay close attention to movement in Tax Reform and Health Care. Overseas, North Korea is still a hot spot but so is Israel (recent military action) and Iran (Trump decertified deal and sent back to Congress). Catalonia is also on the radar with its attempted split with Spain.
(2) Across the Pond: The economic data this week with the gravitas to move markets is coming from overseas this week. We have already received higher than expected inflationary data out of China and stronger production data out of Japan. For the rest of the week, experts will be focusing on Brexit negotiations which appear to be going the wrong direction for Great Britain and may lead to PM May being ousted as a result. China’s Retail Sales and GDP will get a lot of attention this week.
(3) The Talking Fed: There will be a few speeches this week but the bond market will focus on the Beige Book on Wednesday which is prepared specifically for the use in the next Fed meeting in two weeks.
- 10/16 Neel Kashkari
- 10/18 Stanley Fischer, William Dudley, Robert Kaplan, Atlanta Business Inflation and the Beige Book
- 10/19 Philly Fed Business Outlook
- 10/20 Loretta Mester
Market Wrap-up
Overview
There was nowhere for MBS to go today except down as they opened right at the 100 day moving average. Real MBS traders do not want to add to their positions above that level right now. Domestically, it was a real “yawner” as far as anything that could influence long bond trades. But there was stronger than expected economic data out of China, Japan and Germany, which are 3 out of the top 4 global economies. There was also a rise in oil prices. Both are negative for pricing.
Domestic Flavor
Manufacturing: The Empire State (NY) Manufacturing Survey was much stronger than expected, coming in at 30.2 vs estimates of 20.0. The employment component shot up 5 points, which is the strongest hiring rate since 2015.
Texas Tea, Black Gold: WTI Oil increased by 0.82% to $51.87 on Iraqi/Kurd news as well as an oil rig fire in the U.S.
On Deck for Tomorrow: Import and Export Prices, Industrial Production, Home Builders Index.
Across the Pond
China (number 2 economy): PPI YOY hit 6.9% vs estimates of 6.3% and CPI YOY hit 1.6% vs estimates of 1.6%
Japan (number 3 economy): Industrial Production YOY was 5.3% and Capacity Utilization hit 3.3%.
Germany (number 4 economy): Wholesale Prices came in hotter than expected (0.6% vs estimates of 0.4%).
The Talking Fed
Minneapolis Fed President Neel Kashkari (voting member) spoke.