What’s on the agenda for this week?
This is a holiday-shortened week with only a few items that have any probability to impact pricing.
The three areas that have the greatest ability to impact back end pricing this week are. (1) Tax Reform, (2) Across the Pond and (3) Domestic Flavor
(1) Tax Reform: While it has moved past the house, the market is not pricing in that it will pass in the Senate at this point. The revised bill has made it out of committee but cannot be voted on until they return from their holiday break. However, comments from Republican Senators that are “on the fence” will carry great weight with the bond markets.
(2) Across the Pond: There is plenty to rile the bond markets. Germany’s PM Merkel is in trouble and so is Great Britain’s PM May and the Brexit negotiations are a mess. The more this tragic soap opera plays out, the more uncertainty and instability there is in the markets. We also hear from ECB President Draghi and get key economic releases from Japan, Germany, Eurozone, and GB.
(3) Domestic Flavor: Wednesday will be the biggest day of the week with the release of the minutes from the last Fed meeting as well as important data points with Durable Goods Orders and Consumer Sentiment.
Schedule for this Week
Monday – Bond market open full session, you will get the Morning Coffee Update and the What Really Happened reports.
Tuesday – Bond market open full session, you will get the Morning Coffee Update and the What Really Happened reports.
Wednesday – Bond market open full session, you will get the Morning Coffee Update, there will be no afternoon reports or commentary.
Thursday – Bond market is closed.
Friday – Bond market reopens but closes early at 2pm. There will be no morning or afternoon commentary.
Learn from the Past
Mortgage backed securities (MBS) gained 23 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower for the week.
This was a very light week for economic data as there was not a single economic release that had the gravitas to move the needle on rates. It was also a shortened trading session with the bond markets closed on Friday in observance of Veteran’s Day.
The bond market focused on two key areas: The Fed and Tax Reform. Both gave the bond market more uncertainty.
Inflation? The October Headline Consumer Prices Index YOY hit 2.0% vs estimates of 2.0%. So, the 2.8% PPI rate did not flow through to consumer prices. The more closely watched Core CPI YOY came in a tick higher than expected (1.8% vs estimates of 1.7%) but still remains below the 2.0% threshold.
The October Headline Producer Prices Index YOY hit 2.8% vs estimates of 2.4%. It was 2.6% In September. The Core reading (ex food and energy) YOY came in at 2.4% vs estimates of 2.3%. Overall, a solid report but the markets will wait to see if it shows up in CPI.
The Atlanta Fed Business Inflation Survey increased from 1.8% in October to 2.0% in November which is the highest reading since June.
Retail Sales: This data was better than expected. The Headline October reading came in at 0.2% vs estimates of 0.0%. But more importantly, the September data was revised higher from 1.6% to 1.9%. Ex-Autos, Retail Sales gained 0.1% vs estimates of 0.2% but again, September was revised higher from 1.0% to 1.2%.
A light day with no new geo-political fear to push up MBS pricing. As expected the ceiling of resistance was not to be trifled with. MBS saw a little pressure on the news that uber dove Yellen would not be on the board next year.
Leading Economic Indicators: The October release came in at double the market expectations (1.2% vs estimates of 0.6%), plus September was revised upward from -0.2% to +0.1%.
On Deck for Tomorrow: Existing Home Sales.
The Talking Fed
Fed Chair Janet Yellen> turned in her official resignation letter today. She said she would stay on until the swearing in of the new Fed Chair Jerome Powell. However, the letter made it clear that she is resigning from the Fed completely and is not going to remain on the Board of Governors in another role. This is key because the board is short of voting members and her staying on in a different capacity was a consideration.
Across the Pond
Germany: Their PPI YOY hit 2.7% which matched expectations.