Learn from the Past
Overview
Mortgage backed securities (MBS) lost -19 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher for the week.
It was another holiday-shortened week with bond trading closed on Monday for New Year’s Day. Once again there was very strong economic data which did pressure MBS trades lower (higher mortgage rates) but this was mitigated by concern over a looming Government Shutdown (January 19th) and geo-political concerns overseas.
Bureau of Labor Statistics
The U.S. Bureau of Labor and Statistics released the data from their survey on Friday.
You can read their official report here.
Here is the Tale of the Tape:
Payrolls:
December Non-Farm Payrolls 148K vs estimates of 190K.
November Non-Farm Payrolls revised upward from 228K to 252K.
October Non-Farm Payrolls revised downward from 244K to 211K.
The number that the bond market pays attention to is the rolling three month average and it is above 200K at 204K.
Wages:
Average Hourly Wages for December had a monthly gain of 0.3% which matched expectations.
Average Hourly Wages YOY had a gain of 2.5% which also matched expectations.
The national average hourly wage is now $26.63.
The bond market is the most sensitive to this data set and it was right what the market expected.
Unemployment:
The national Unemployment Rate remained at 4.1% for the 3rd straight month.
The Participation Rate remained at 6.7%.
This survey data is basically ignored by bond traders.
Domestic Flavor
ISM Services: The December reading hit 55.9 vs estimates of 57.6. This data set was a miss but it is still above 55.0 which is very strong considering any reading above 50.0 is expansionary.
Manufacturing: The ISM Manufacturing Index for December was stronger than expected (59.7 vs estimates of 58.0) and is the 2nd highest reading since March of 2011. ISM Prices Paid (a key measure of future inflation expectations) jumped to 69.0 vs estimates of 65.0 and is one of the highest readings on record.
Factory Orders: The November reading was stronger than expected (1.4% vs estimates of 1.1%) and October was revised upward significantly from -0.1% to +0.4%.
Construction Spending: The November data showed a nice pick up of 0.8% which beat out estimates of 0.5%. However October was revised lower from 1.4% to 0.9%.
The Talking Fed
Cleveland Fed President Loretta Mester (voting member) said she is “okay” with “three or four” rate hikes next year based upon her economic expectations but will need to see how Tax Reform impacts growth.
FOMC issued the Minutes from their last meeting where they raised their Fed Fund Rate by 1/4 point and showed median expectations of at least 3 rate hikes in 2018. There really were not any “bombshells” in the Minutes as views were generally favorable towards economic growth and the need to flatten out the curve (between inflation and the fund rate, which requires raising the Fed fund rate).
What’s on the Agenda for this Week?
Overview
This is the first full week (5 trading sessions) since the week of December 18th. The economic data and growth expectations are very negative for both short and long term pricing but the great equalizer – fear – has been mitigating that downside. The only question this week is just how much new “fear” will be injected into the marketplace. There are some key economic releases but only Friday’s data has the gravitas to move pricing. If there is real movement on the Government shutdown talks then MBS will sell off. If it continues in this quagmire with both parties far apart on key provisions then MBS will continue to see support but not real gains. Gains can only come from heightened fear out of Europe/Asia and that is something you cannot plan for.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political Concerns, (2) Domestic Flavor and (3) The Talking Fed.
(1) Geo-Political Concerns: Front and center is the looming partial government shutdown that is less than 2 weeks away. This is supposed to be a “line in the sand” and not a “kick the can down the road” date. As you recall, we have just had two straight extensions. It is very clear that the two sides of the aisle are very far apart in a number of key topics and unlike Tax Reform, this will take a considerable amount of support from both parties.
It’s Fat Baby (aka Rocket Man)’s birthday (we think…NK won’t confirm his actual date of birth, it’s a government secret). Regardless, it puts his regime’s threats in the spotlight – global financial markets do expect some sort of escalation but are unsure if that will come in the short term or longer term.
There will also continue to be concern over Brexit talks as PM May is reshuffling her Cabinet and there is major instability in Spain and Italy.
(2) Domestic Flavor: This is back loaded with some very big economic releases which include Retail Sales, CPI and PPI. Experts will be watching CPI closely to see if the YOY Core moves closer to that 2.0% mark, the headline CPI is already above 2.0%
(3) The Talking Fed: We are getting close to February when the still unconfirmed Jerome Powell will take over as Fed Chair. This week we will hear from a lot of Fed members including William Dudley which is also on his way out.
01/08 Eric Rosengren, Raphael Bostic, John Williams
01/09 Neel Kashkari
01/10 Charles Evans, Atlanta Fed Business Inflation Expectations and James Bullard
01/11 William Dudley, Fed’s Balance Sheet
Treasury Actions this Week
01/09 3 year note
01/10 10 year note
01/11 30 year bond
Market Wrap-up
Overview
The week opened with a very mild trading session as there were no major economic releases and no new “fear” in the marketplace. As a result, MBS had nowhere to go but sideways.
Domestic Flavor
Consumer Credit: Jumped by $8B with a reading of $28.0B in November. When you strip out Auto Loans and Student Loans, revolving debt (credit cards) was up a sizable $11.2B which means consumers were spending big time in November.
On Deck for Tomorrow: JOLTS, 3 year Treasury Auction, ECB non-monetary policy meeting,
The Talking Fed
S.F. Fed President John Williams said he favors keeping interest rates lower for longer to keep average inflation on a steady upward path over the years, which is called “price level targeting”. He is not a voting member this year.
Atlanta Fed President Raphael Bostic said, “Long-term rates have been much stickier…I am going to do all I can to make sure our policy does not invert the yield curve,” Bostic also said, “If we got close to it I would argue strongly that we should be extremely cautious.” He said he sees “2 or 3” rate hikes this year to get to the Fed’s target rate. He is a voting member this year.
Across the Pond
Germany: Factory Orders YOY were up 8.7% vs estimates of 7.8%
Eurozone: Retail Sales YOY were 2.8% vs estimates of 2.2%. Consumer Confidence was 0.5 vs est imatesof 0.5.