Learn from the Past
Overview
Mortgage backed securities (MBS) lost 5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
It was another week of strong economic data (Retail Sales) and our Federal Reserve raised their key interest rate (they do not control mortgage rates) as well as upgraded their economic projections. MBS were largely not impacted by the Fed action and had only a very small change for the week.
The Talking Fed
As widely expected, the FOMC voted to increase their key Fed Fund Rate by 0.25% to a range of 1.25% to 1.50% which is still well below the “neutral” rate (when inflation are rates are equal).
You can read the official Fed statement here.
You can read their official economic projections here.
It was a very interesting contrast where the majority of the economic outlook was stronger than expected while their expectations were that it would take a “couple of years” for inflation to hit 2%.
The vote was 8-2 with Kashkari and Evans voting against it. However, BOTH of those Fed members are non-voting members in 2018, so their influence is greatly minimized.
Here are some key takeaways from the Fed:
– Median expectations for the Unemployment Rate in 2018 and 2019 is 3.9%
– Median expectations for GDP in 2017 and 2018 is 2.5% and in 2019 its 2.1%
– Inflation expectations don’t hit 2.0% until 2019
– Leaves pace of reduction in MBS and Treasuries as is
– Yellen says tax reform would give economy a boost
– Dot plot chart shows 3 rate hikes in 2018
Retail Sales
This was a very strong report. The Headline November reading showed a MOM gain of 0.8% which is almost three times higher than expectations of 0.3%. Actually its better than that considering that October was revised high from 0.2% to 0.5%. Ex- Autos the data was even better with a 1.0% gain vs est of 0.6%, plus October was revised upward from 0.1% to 0.4%.
Learn from the Past
Overview
The bond market closes early on Friday in observance of Christmas and will not reopen until Tuesday. Overseas events will get a lot of attention by global traders and domestically Tax Reform will be the major event of the week. MBS have been trading at very elevated levels and are likely to continue to trade at high levels. But there needs to be a NEW propellant for MBS to trade higher for better pricing. That would have to come at the cost of the Tax Bill imploding AND an official Government shutdown this week. Barring those two things from happening, there is really no justification for taking risk this week.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Tax Reform, (2) Government Shutdown and (3) Domestic Flavor.
(1) Tax Reform: The reconciled Tax Bill has been finalized. You can read the official Bill here.
It will be voted on by the House on Tuesday and then to the Senate on Wednesday or Thursday. It is still a very close call in the Senate as McCain is back in AZ and will not vote at all on the bill. But offsetting that are Lee and Cochran who will vote for it. Still, there are still a few Republican Senators that are “on the bubble” and have not confirmed that they will support the Bill.
(2) Government Shutdown: The can was kicked all the way to Friday and the push is on to get more permanent funding through. This may be more difficult than the Tax Bill as there actually needs to be bipartisan support to get longer term funding through. The Democrats are using this as their one opportunity to leverage some of their key issues that are not budget/economic related and are folding them into negotiations which may cause a government shutdown by Christmas.
(3) Domestic Flavor: The most important report of the week is Friday’s Core YOY PCE reading as the “official” inflation rate. Thursday’s revision to the 3rd quarter GDP (3.3%) will also get a lot of attention.
This week has a lot of key housing related reports. They do not impact your pricing but are always important to watch.
12/18 NAHB Housing Market Index
12/19 New Housing Starts and Building Permits
12/20 Existing Home Sales
12/21 FHFA Home Price Index
12/22 New Home Sales
Across the Pond
Brexit: The uncertainty of PM May to get anything done or to even get a good deal has certainly helped bonds globally. There are several key meetings this week that the markets will closely watch.
China: Their annual Central Economic Work Conference starts Monday and continues into Wednesday.
Japan: The Bank of Japan monetary policy meeting followed by Governor Kuroda’s press conference.
Market Wrap-up
Overview
As expected, it was a very tame session today. There were no major economic releases and nothing will happen with Tax Reform until tomorrow at the earliest. The NASDAQ has topped 7K for the first time but the euphoria in the stock markets has zero impact on MBS.
Domestic Flavor
Housing: The December NAHB Housing Market Index jumped to 74.0 which is the hottest reading since 1999.
On Deck for Tomorrow: New Housing Starts, Building Permits and possible afternoon vote in the House.
Across the Pond
Eurozone: Their CPI YOY matched market expectations with a 1.5% reading.