Learn from the Past
Overview
Mortgage backed securities (MBS) lost 48 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher for the week.
There was some very strong economic data (Retail Sales, CPI) released and a very well received 30 year Treasury bond auction, both of which pressured long bond prices. There was also news that Japan had decreased their balance sheet (aka a taper in bond purchases) and a news story (which China decried as a fake news) that China has been purchasing less U.S. debt (Treasury notes) and would decrease purchases further in 2018. That signaled to bond traders that there may be less demand and also hurt MBS prices.
Domestic Flavor
Retail Sales: Both Headline and Ex Autos showed a monthly growth rate of 0.4% in December which matched expectations. But the real story was the upward revisions to November. Headline was revised from 0.8% to 0.9% and Ex Autos was revised from 1.0% to 1.3% which is a very strong reading.
Inflation: December’s Consumer Price Index report showed an upward movement in inflation. The closely watched Core YOY CPI moved from 1.7% to 1.8%. A small move but just one more tick closer to the 2.0% Fed target inflation rate which has been stubbornly evasive in this key data set. Producer Price Index YOY hit 3.0% vs estimates of 3.0%.
Treasury Auctions: There was very strong demand for the 30 year Treasury bond auction with indirect bids topping 70%. $12B went off at a high yield of 2.867% which is a very good rate considering that this time last year it was 2.914%.
Small Business Optimism: The NFIB Index hit 104.9 which is a slight pull back from November’s reading of 107.5. However, November’s reading was a 13 year high and this reading is one of the best that has been seen. So, this is still trending at very elevated levels.
Jobs, Jobs, Jobs: The November Job Openings and Labor Turnover Survey (JOLTS) show there are 5.9M jobs that are awaiting people with the proper job skills to fill them. This is a little lighter than market expectations but basically at the same pace as October.
What’s on the Agenda for this Week?
Overview
The first 15 days of January are in the bag. How have we started the year? Down 74 BPS, that’s how. And experts think that is going to be a longer term trend as the combination of growth and global central bank bond tapering will pressure MBS lower. However, our own geo-political dysfunction is proving some strong report in the short term (just imagine how much worse MBS would be than just down 74BPS without the support). The concern over a government shutdown on the 19th is keeping MBS afloat today and will do so this week. IF we actually get a shutdown, then MBS may see some gains this week (that will be temporary). IF we get the “can kicked” then MBS will trade sideways, IF there is a real agreement, then MBS will sell off. So far it looks like the first two scenarios seem the most likely but we will have to watch how this all plays out.
Three Things
The Three Things that have the greatest ability to impact backend pricing this week are: (1) Geo Political, (2) The Federal Reserve and (3) Across the Pond.
(1) Geo-Political: Government Shutdown? That’s what the market is hedging towards as the White House and Dems are far apart on DACA/Immigration and spending. Most likely scenario is another short term “kick the can” deal which keeps the bond markets hostage until a real agreement is passed.
(2) The Federal Reserve: On Wednesday they release their Beige Book. This is prepared by the 12 Fed Districts to be used in the next Fed meeting. Experts will be paying close attention to any upward shift in expectations due to the passage of Tax Reform. We will also hear from Charles Evans, Robert Kaplan and Loretta Mester.
(3) Across the Pond: There will be some big name economic releases that have the gravitas to impact bond trades. The stronger these reports are, the worse it is for rates. The weaker they are, the better it is for rates. China (number 2) will release their GDP, Retail Sales and Industrial Production. Japan (number 3) will release their Industrial Production. The Eurozone will release their CPI data. Canada will have their Central Bank meeting and interest rate decision.
Market Wrap-up
Overview
As expected, a real “yawner” today as far as MBS pricing. There was no domestic data with the gravitas to move pricing. Across the Pond the data was pretty solid but concern over the looming government shutdown is providing plenty of support right now.
Domestic Flavor
Manufacturing: The January Prelim Empire State (NY) Manufacturing Survey continued to show strong expansion with a 17.7 reading. The final December reading was revised upward from 18.0 to 19.6.
On Deck for Tomorrow: Weekly Mortgage Applications, Industrial Production and Capacity Utilization, NAHB Housing Market Index and the Fed’s Beige Book.
Across the Pond
Japan: Their All Industry Activity Index came in almost three times higher than expectations (1.1% vs est of 0.4%).
Germany: CPI YOY hit 1.7% vs estimates of 1.7%.
Great Britain: Their CPI YOY hit 3.0% which matched expectations. But Retail Sale Prices jumped by 4.1% vs estimates of 3.9%.