Learn from the Past
Mortgage backed securities (MBS) lost 51 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.
Tax reform took center stage and as it moved forward with the voting process through the week, it pressured MBS lower (higher rates). There was also some very solid economic data which pressured MBS pricing as well.
Can Kicked: The Government will remain open until January 19th now.
GDP: The 3rd quarter GDP number was revised from 3.3% down to 3.2%. It’s the third time that we have seen this data and it has been revised higher and then lower. Regardless, it remains above 3.0% which is a strong reading and is the highest reading since Q1 2015.
Tax Reform: The Tax Bill was officially passed by both the House and the Senate and was signed into law by our President on Friday. The key for the bond markets and rates is the macroeconomic impact of over 4 trillion dollars of cash moving back into the U.S. from overseas. Already we are getting some positive comments from some of the largest U.S. corporations:
– ATT says it will give a $1,000 bonus to 200,000 of its workers AND will make $1 billion dollars in capital investments
– FedEx gave an upbeat earnings forecast for 2018, saying it expects to benefit from the tax overhaul
– Fifth Third Bank says it will give a $1,000 bonus to 13,000 workers and will raise the minimum wage for its workers to $15 per hour
Durable Goods: While the headline number looks like a miss, actually due to the upward revisions to the prior month, these were okay readings. Durable Good Orders for November were up by 1.3% vs estimates of 2.0%. However, the miss was due to the fact that October was revised upward significantly from -1.2% to -0.4%. New Orders are now up 8.9% on a YOY basis which is pretty solid.
Personal Consumption: Spending is the highlight of this report as Personal Spending in November increased by 0.6%. Personal Income increased by 0.3%. The Fed’s key measure of inflation, PCE YOY, hit 1.8%, still below their target rate of 2.0%.
Consumer Sentiment: The University of Michigan’s Final December Reading was revised from 96.8 to 95.9. Still a very lofty number historically, it does not appear to be enough right now. However, just because there is some support here, it does not mean it will have a rebound from the justified sell-off this week.
What’s on the Agenda for this Week?
This week will be a fairly boring week for MBS trades. With the exception of Consumer Confidence on Wednesday, there won’t be any major reports that can impact pricing. Most bond traders are off this week and look for very “thin” volumes as there are really only three full days of trading this week. As a result, MBS are expected to basically move sideways.
Normally this section lists the three areas that have the greatest ability to impact pricing. However, this holiday-shortened week (closed Monday for Christmas and the bond market closes early this Friday), coupled with very low level economic releases, means that there really aren’t “three things” out there with the gravitas to move the needle on pricing.
Treasury Auctions This Week
12/26 2 year
12/27 5 year
12/28 7 year
As expected, it was a fairly tame day with MBS trading in a tight range. There was a dismal 2 year note auction but it had no impact on MBS pricing.
Taking it to the House: The October Case-Shiller Home Price Index showed a YOY gain of 6.4% in their 20 metro city index. The median price from the Existing Homes report is a much better data set and gets more attention than this reading but still, it is yet another housing report showing steady appreciation.
Manufacturing: There were two regional reports: The Dallas Fed Manufacturing Index jumped to 29.7 vs estimates of 20.0 and The Richmond Fed Manufacturing Index hit 20 vs estimates of 22. So, a mixed bag there.
On Deck for Tomorrow: Pending Home Sales, 5 year Treasury Note Auction, Bank of Japan Minutes, Mortgage Applications and Consumer Confidence.