Learn from the Past
Overview
Mortgage backed securities (MBS) gained 9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
It was a holiday-shortened week with really only three full days of bond trading. It was a very light week in terms of economic releases that had any ability to impact bond trades.
Domestic Flavor
Chicago Fed National Activity Index: The October reading showed a spike in overall economic activity and inflation and came in 3 times higher than expected (0.65 vs estimates of 0.2).
Existing Home Sales: The October data was stronger than expected (5.48M vs estimates of 5.43M units). Supply continues to be very thin with only 3.9 months’ worth available. Six months’ worth of inventory is considered to be optimal. The median sales price fell -0.2% to 247K which a 5.5% gain from this time last 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%.
Durable Goods Orders: The Headline Preliminary October reading was weaker than expected (-1.2% vs estimates of 0.4%) but just one airplane order can skew that number. Overall, the report had some bright spots. Ex-Transportation, Durable Goods Orders increased by 0.4% which was in line with estimates of 0.5%. But offsetting that small miss was the fact that September’s reading was revised upward from 0.7% to 1.1% which is significant.
The Talking Fed: Fed Chair
Janet Yellen turned in her official resignation. 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.
What‘s on the agenda for this week?
Overview
This week could really see a lot of volatility, with large swings. If tax reform is done on Thursday or Friday in the Senate, there could be a large sell-off in MBS (depending on what is in the final bill). Comments from Yellen, Powell and Dudley can also move the markets and there will be some big name economic releases (PCE, GDP, Chicago PMI, ISM) that can move pricing too.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Domestic Flavor and (3) Tax Reform.
(1) The Talking Fed: They will issue their Beige Book that is prepared specifically for the December FOMC meeting and we will hear from Janet Yellen and other key Fed members. Also, the Senate begins confirmation hearings on new Fed Chair Powell.
11/27 – Neel Kashkari, William Dudley
11/28 – William Dudley, Jerome Powell, Senate Confirmation hearings begin
11/29 – Fed’s Beige Book, Janet Yellen, William Dudley, and John Williams
11/30 – Robert Kaplan, Fed Balance Sheet
12/01 – James Bullard and Robert Kaplan
(2) Domestic Flavor: There will be a lot of big name economic releases this week that actually have the gravitas to move pricing. Thursday’s PCE reading will be the most important as it is the “official” inflation gauge of the Fed. The closer the YOY reading is to 2.0%, the worse it will be for pricing. There will also be the first revision to the 3rd quarter GDP which is expected to move up from the previously released 3.0% to 3.2%. Rounding out the week are important manufacturing readings with the Chicago PMI and ISM Manufacturing.
(3) Tax Reform: The Senate is back from vacation and their tax bill is headed for a marathon debate this week with the aim to hold a floor vote as early as Thursday. Should it pass, Republican leaders will have to hammer out a compromise between different provisions in the House and Senate bills. President Trump will be making a final push as there are still several uncommitted Republican Senators.
Treasury Auctions This Week
11/27 2 year Note, 5 year Note
11/28 7 year Note
Market Wrap-up
Overview
It was a fairly quiet day as MBS have traded right in the expected range. There were no major economic releases today and the two Treasury auctions are too short of a term to impact MBS pricing. MBS did continue to trade at great levels as Tax Reform took one step forward and two steps backward.
Domestic Flavor
Housing: October New Home Sales were stronger than expected (685K vs estimates of 620K) and hit their best levels in 10 years. The average sales price (not the same as the median sales price) came in at above $400K for the first time ever.
On Deck for Tomorrow: FHFA Housing Price Index, Case-Shiller Housing Price Index, Consumer Confidence and a 7 year Treasury auction. Also, the Senate will begin to deliberate on the Powell Fed Chair nomination.
Treasury Auctions
The $26B 2 year note went off at a high yield of 1.765%. It was a very weak auction as that was the highest 2 year rate at auction since 2008. Demand was also light with a bid-to-cover ratio of 2.3 which was the lightest since March.
The $34B 5 year note went off at a high yield of 2.066% which is the highest rate paid at auction this year. Demand was good though with a bid-to-cover ratio of 2.46
The Talking Fed
Dallas Fed President Robert Kaplan (voting member) said, “I believe it will likely be appropriate, in the near future, to take the next step in the process of removing monetary accommodation.”
Tax Reform?
Conservative KY Senator Rand Paul said he would vote for the Senate plan saying that it was an incremental step in the right direction but not a solution “as is.” However, Wisconsin’s Ron Johnson has already (before Thanksgiving) come out against this bill and today we add Montana’s Steve Daines to the “no” list. There are also another 7 Republican Senators that have not come out as a yes or a no with John McCain assumed to be a no in the last second.