Learn from the Past
Mortgage backed securities (MBS) lost 14 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher for the week. It was a “choppier” week than recent norms with a -52 BPS swing from the best pricing of the week to the worst pricing of the week.
It was a very big week on just about every front. Tax reform was finally passed early Saturday morning but during the week, MBS both improved and sold off on speculation of the bill passing or not passing. There was a huge dose of economic data with very strong GDP and Manufacturing data which was very positive for our economy and therefore negative for long bonds that do not perform well in a growth environment. But the biggest market mover was when the news broke that Flynn was going to plead guilty to lying to the FBI. Initially the bond market thought that this may derail support for our President and cause the tax bill to not make it, but in the end that did not happen.
Manufacturing: The November ISM Manufacturing (1/3 of our economy) was very strong but basically was in line with estimates (58.2 vs 58.4). Any reading above 55 is very hot.
The November Chicago PMI hit 63.9 vs estimates of 63.0. Any reading above 50 is strong and readings above 60.0 are very, very strong. This marks the third straight month with a reading above 60.0 which has not happened since 2010.
GDP: The first revision to the previously released 3rd quarter GDP was released. It was revised upward from 3.0% to 3.3%. The market was expecting 3.2%. It is the highest growth rate since Q1 2015.
Construction Spending: It had a nice pickup in October as it gained +1.4% vs estimates of 0.4%. YOY it is now up 2.9%. Overall a very good report.
Personal Income and Outlays: Wages were higher than expected as October’s Personal Income increased by another 0.4% vs estimates of 0.3%. Personal Spending matched expectations with a monthly gain of 0.3%. The spread between the rising incomes and spending means that there was actually a 1% increase in the personal savings rate.
Personal Consumption Expenditures (PCE), the Fed’s key measure of inflation, increased by 1.6% on a YOY basis which was a little higher than expectations of 1.5%. Plus September was revised upward from 1.6% to 1.7%, still below the Fed’s target rate of 2.0% but moving closer. Core PCE YOY hit 1.4% which matched expectations.
The Talking Fed
President Donald Trump has nominated Carnegie Mellon University professor Marvin Goodfriend to be a member of the Federal Reserve Board of Governors. He would be filling a vacancy that happened in 2014 and has never been filled.
Fed Chair Janet Yellen gave an Economic Update to the House. She opened with “The economic expansion is increasingly broad based across sectors as well as across much of the global economy,” and “I expect that, with gradual adjustments in the stance of monetary policy, the economy will continue to expand and the job market will strengthen somewhat further, supporting faster growth in wages and incomes.” She also said that Congress needs to pass more “pro-growth” policies and was concerned that after she leaves that there will only be 4 members on the Board of Governors.
The Fed’s Beige Book was released and showed that the U.S. economy continued to grow at a “modest to moderate pace” through mid-November as the labor market tightened. The survey also noted “Most districts reported employers were having difficulties finding qualified workers across skill levels.” Still, “wage growth was modest or moderate in most districts.” This is prepared by all 12 districts and is used in the next FOMC policy meeting.
What’s on the agenda for this week?
This will be a very pivotal week for MBS. They are trending in a very well defined range that is similar to last week. Progress on the tax bill reconciliation process will be something that also provides pressure on MBS. But there is plenty of geopolitical wildcards that could provide momentum as well. For the week, it will take very weak wage data, and a spike in the Flynn-FBI activity as well as revisions to the tax plan that are not as progressive to see any real price improvement.
The three areas that have the greatest ability to impact mortgage rates this week are: (1)Jobs, (2) Geopolitical and (3) Across the Pond
(1) Jobs: There are a slew of wage and jobs related data this week with the market focus primarily on Friday’s Non-Farm Payrolls and Average Hourly Wages YOY. The stronger these data points are, the worse it is for mortgage rates; the weaker this data is, the better it will be for rates.
- 12/05 – ISM Services – Employment Index
- 12/06 – ADP Private Payrolls, Unit Labor Costs
- 12/07 – Challenger Grey Job Cuts, Initial Jobless Claims
- 12/08 – Non-Farm Payrolls, Unemployment Rate, Participation Rate, Average Hourly Wages.
(2) Geopolitical: There will be plenty of drama this week. Now that the Senate has passed their form of the tax bill, it must be reconciled with the House version. The final bill that emerges out of that process could be different than what the markets expect. For example, the corporate tax rate could end up being 22 or 23 percent instead of the 20% rate passed by the Senate. The final Bill that is put forth for the President’s signature will drive markets. Of course, the Michael Flynn/FBI vs Trump saga will get plenty of press and attention by the markets as well.
(3) Across the Pond: This is an important week for international events that can impact the bond markets and mortgage rates. Both Canada and Australia have Central Bank meetings and interest rate decisions. Brexit is front and center with Great Britain and Ireland already hammering out border agreements, and Prime Minister May will be meeting with key EU leadership on finalizing the financial penalty for their leaving the EU.
There will also be some significant economic releases from the worlds’ largest economies.
- China: Caixin Services PMI, Imports and Exports
- Japan: Consumer Confidence, GDP
- Eurozone: PPI, Retail Sales, Non-Monetary Policy ECB Meeting
A fairly mild start to what could be a very volatile week. Today’s economic data was a little better than expected but it was a lower tier report. And there was no real movement on any of the geopolitical issues. The stock market certainly took off on the tax news but the bond market has more of a “wait and see” tone right now.
Manufacturing: October Factory Orders were better than expected (-0.1% vs estimates of 0.4%), plus September was revised upward from 1.4% to 1.7%. This report showed a nice 0.7% gain in non-durable goods orders.
On Deck for Tomorrow: ISM Services, Economic Optimism.
No New Deals: No new deal yet for Brexit as both sides said that they were “close” but would not have any announcement today. And no deal yet for U.S. tax reform as the reconciliation process has just begun. And no new deal to keep the U.S. Government open as both Schumer and Pelosi said they will not meet with our President until the day before the shutdown target date hits.
Across the Pond
Eurozone: Their PPI was a smidge higher than expected (0.4% vs estimates of 0.3%).
On Deck for Tomorrow: Eurozone Retail Sales, Chinese PMI.