Learn from the past
Mortgage backed securities (MBS) gained 18 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower for the week.
Domestic economic data was strong but not strong enough to impact MBS trades as they were essentially in a holding pattern as the bond market was stuck in Tax Reform watch…waiting to see if the Bill would make it out of the reconciliation committee and if it does, how much different will it be from the original Senate/House versions.
Domestic Flavor – Jobs, Jobs, Jobs
Big Jobs Friday! You can read the official release from the Bureau of Labor Statistics here. Tale of the Tape:
November Non-Farm Payrolls 228K vs estimates that were in the 190K to 200K range.
October NFP was revised lower from 261K down to 244K.
September NFP was revised from 18K to 38K.
NFP Rolling 3 month average is now 170K which is a good level and is an improvement over last month’s 3 month rolling average pace of 162K.
Average Hourly Wages increased on a month-over-month basis by 0.2% and is now $26.55 per hour. The market was expecting a 0.3% increase.
Average Hourly Wages YOY moved from a 2.4% pace in October to a 2.5% pace in November.
There was a rare increase in Average Hourly Wages from being stuck at 34.4 for several months up to 34.5 hours. Usually an uptick in hours worked is a precursor to wage increases.
The Unemployment Rate remained unchanged at 4.1%. However, for the first time on record, the manufacturing sector fell below 3.0% (2.6%).
The Participation Rate remained at 62.7%.
LinkedIn showed that hiring in November showed a 26% increase YOY. U.S. hiring has been 10.4% higher in 2017 than in 2016. LinkedIn’s report is compiled from its 143 million user profiles in the U.S., 20,000 company profiles and 3 million monthly job postings.
The preliminary December University of Michigan reading hit 96.8 which is a very strong reading but below expectations of 98.8; it will be revised in 2 weeks.
The November reading was lighter than market expectations (57.4 vs estimates of 59.0) and a pull back from October’s crazy hot reading of 60.1. But any reading above 50.0 shows monthly expansion and a reading above 55.0 is still very robust.
Can kicked: The House and Senate voted to extend everything until December 22nd.
What’s on the agenda for this week?
Look for MBS to trade in a relative sideways range until Wednesday’s FOMC meeting. MBS will react to how many 2018 and 2019 rate hikes are being projected more so than by their 1/4 point move. However, comments by Yellen can also have a large impact. The MBS market is priced for no surprises from the Fed and no movement in Tax Reform. So, they are likely near their highs already.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bankpalooza, (2) Tax Reform? and (3) Domestic Flavor.
(1) Central Bankpalooza: Our Federal Reserve Open Market Committee (FOMC) begins two days of meetings on Tuesday and will culminate Wednesday afternoon with their policy statement and interest rate decision. But they will also release their revised economic projections (famous dot-plot chart) and will be followed up with a live press conference with Janet Yellen. While all markets widely expect a 1/4 point rate hike, the bond markets will be focusing on their future rate hike projections (dot-plot chart) to see if the consensus among the Fed is 2 or 4 rate hikes next year.
(2) Tax Reform? The bond market continues to put a low probability on Tax Reform getting done by the end of the year. And if it is done, that many of the most stimulative measures will be watered down in order to get the bill out of reconciliation. Any announced agreements/changes to the Tax Bill will have a big impact on pricing.
(3) Domestic Flavor: This is actually a big week for economic releases outside of the Fed. Retail Sales will take center stage and Core CPI (YOY) will get a lot of attention.
Treasury Auctions This Week
12/11 3 year Note, 10 year Note
12/12 30 year Bond
It’s not that there was anything that happened that directly pressured MBS, it’s that there was a lack of anything that would cause MBS to rise. Today’s strong JOLTS (Job Openings and Labor Turnover Survey) and weak 10Y auction were largely ignored by bond traders. There was no new movement in Tax Reform and MBS simply had nowhere to go.
Jobs, Jobs, Jobs: The JOLTS continued to show a very tight labor market with 5.996M unfilled jobs. While that is a slight decrease from September’s 6.093M pace, it is a huge number. This once again points to a huge gap in skilled workers.
Treasury Auctions: There were two today, a 3 year and 10 year note. Neither had any impact on MBS pricing. For the 10Y, $20B went off at a high yield rate of 2.384% which has been in the “open” market since May. Demand was soft with a bid-to-cover ratio of 2.37
On Deck for Tomorrow: Monthly FNMA Coupon Rollover, FOMC meetings begin, Producer Price Index and the 30 year Treasury bond auction.