Learn from the Past
Mortgage backed securities (MBS) lost 62 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week. MBS are now down 136 BPS so far this year.
It was a holiday-shortened week (Monday closed for MLK Day) that ended with a government shutdown. In between, long bonds continued their downward decline as bond traders are still at just the very early stages of rotating funds out of their positions in bonds due to the expected economic boost from Tax Reform.
New Housing Starts in December missed the mark with 1.192M units (calculated on an annualized basis) vs estimates of 1.275M. The real housing market is San Francisco and that came in at 836K which is not bad but off the pace in November. Needs to be consistently above 1M for it to help with our massive inventory shortage. Building Permits were stronger than expected (1.302M vs estimates of 1.290M). San Francisco permits gained 1.8% to 881K.
The NAHB Housing Market Index for January hit 72 vs estimates of 72. This continues a string of very strong readings; any reading above 50 is favorable.
Production: December Industrial Production was more than double the market expectations (0.9% vs estimates of 0.4%) and Capacity Utilization was very robust with a 77.9% reading. This was the highest reading in 3 years.
Consumer Sentiment: The preliminary January University of Michigan’s Consumer Sentiment Survey Index came in at 94.5 vs estimates of 97.0. But this number will be revised once more this month. What is interesting in the survey is that expectations of inflation rose in the one year and five year horizon.
The Federal Reserve
The Beige Book, which collects data from the 12 Federal Reserve Districts, found that the economy continued to expand from late November, with the various Fed districts reporting “modest to moderate” gains while Dallas was the sole outlier, recording a “robust increase.” Overall, the report showed a very tight labor market with many saying that they could not find skilled workers. But they also said that for the most part, businesses are seeing wages pick up at only a “modest” pace.
What’s on the Agenda for this Week?
MBS are still on a progression lower. IF the government shutdown lingers for the whole week, MBS may make some very small gains but it’s not a trend reversal. Look for MBS to trade in a sideways range until there is some movement in the shutdown.
The three areas that have the greatest ability to impact back end pricing this week are: (1) Geo-Political, (2) Central Bank Palooza and (3) Domestic Flavor.
(1) Geo-political: Our government shutdown is front and center this week. They are expected to try to vote in the Senate today for a stop-gap measure but currently the bond market is on hold until something happens.
(2) Central Bank Palooza: This week will be the Bank of Japan’s interest rate decision and policy statement. Their reduction in bond purchases (revealed in their balance sheet but not announced as formal policy) had a negative impact on MBS. Will there be a rate increase and an official taper announcement? The European Central Bank also will issue their interest rate decision and policy statement. The bond market will pay close attention to the asset purchase plans.
(3) Domestic Flavor: We get our first look at the 4th quarter GDP on Friday. So far both the 2nd and 3rd quarters have seen growth at 3% or higher. This first initial release is projected to be at 2.9%. If there is a 3 on that reading, it will be very negative for bonds.
Treasury Auctions this Week
01/23 2 year note
01/24 5 year note
01/25 7 year note
A very quiet open to the week with no domestic or foreign economic data for the bond market to sink their teeth into. The downward trend remains intact.
Chicago Fed National Activity Index: The December reading was much stronger than expected, posting at 0.27 vs estimates of -0.15. The 3 month rolling average is a very healthy 0.42.
Kick the Can: It’s the latest board game you can buy at Toys-r-Us. Use the Charles “Hair Plug” Schumer and Mitch “I’m still alive, stop trying to check my pulse” McConnell dolls to fund our government just a little bit longer each time without a budget or a game plan. It’s fun and exciting to play.
Today, the Senate overwhelmingly accepted the original proposal that was given to them by the White House before the shutdown. This will give us another couple of weeks to wonder if there will be another government shutdown. But for this week, it means that we will get our economic data.
On Deck for Tomorrow: Richmond Fed, 2 year Treasury note auction.
Across the Pond
International Monetary Fund (IMF): Increased their forward-looking economic projections to show more growth as a direct response to Tax Reform.
The Bank of Japan will issue their Interest Rate Decision and Policy Statement tomorrow.