Learn from the Past
Mortgage backed securities (MBS) lost 6 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week. MBS remained under pressure as long bond strategists continued to shift their hedges towards higher rates in the near term. Overall, the week’s economic data was strong but not by enough to accelerate the sell-off.
Weekly Mortgage Applications increased by 4.5% led by Refinance Applications up 6.0%. Purchase Applications rose by 1.0%.
The November FHFA Housing Price Index rose by 0.4% on a MOM basis and is up 6.5% on YOY basis.
Existing Home Sales in December felt severe inventory constraints. Inventories fell by 10.3% to their lowest levels ever on record. The annualized sales pace hit 5.57M which was lower than the expectations of 5.70M but that was not due to lack of demand, it was due to lack of inventory. The median home price rose to $246,800.
Gross Domestic Product: We got the first look at the 4th quarter GDP. It will be revised several more times but the initial reading of 2.6% is good steady growth. Odds are that by the time the final revision hits, that number will be closer to 2.9%. Consumer Spending saw a very strong 3.8% increase. Other highlights were a 14.2% burst in spending on durable goods items. Residential Investment jumped 11.6% and non-residential fixed investment rose by 6.8%.
Durable Goods Orders for December were much hotter than expected, coming in at 2.9% vs estimates of only 0.6%. Plus, November was revised upward from 1.3% to 1.7%. Aircraft and vehicles saw a nice surge in orders. -9 to -21 BPS range as the bevy of international Services and Manufacturing PMIs are all in the upper 50s to low 60s which is very strong globally.
What’s on the Agenda for this Week?
This is a very big week for speeches, Fed action and a ton of big name economic data. And on Wednesday, Tax Reform begins which is nothing but a giant shot of stimulus for corporations and for the economy. Bonds do not perform well in that environment.
The three areas have the greatest ability to impact back end pricing this week are: (1) The Talking Fed, (2) Tax Reform and (3) Jobs, Jobs, Jobs.
(1) The Talking Fed: Wednesday concludes two days of meetings with the Federal Reserve Open Market Committee (FOMC). This is supposed to be Fed Chair Janet Yellen’s last FOMC meeting. The December meeting was her last live press conference after a FOMC meeting as there is no live press conference at this meeting. While the markets are not expecting a rate hike at this meeting, experts will be paying very close attention to their guidance especially in regards to growth, inflation and their take on the growth prospects of Tax Reform.
(2) Tax Reform: Actually, the bond market has been very stubborn and slow in pricing in the megalithic impact of Tax Reform. But that is changing. On Wednesday, February 1st, that will shift as workers will now see larger take home pay in their paychecks as it goes into effect. But more importantly, this week kicks off the massive repatriation flood of billions of dollars of cash that has been trapped overseas for decades. This wave of cash will be used to buy back stock, increase wages, go into capital investment and more. Our economy has not experienced an event like this before and it will be extremely stimulative to our domestic economy and bonds don’t like that.
(3) Jobs, Jobs, Jobs: Big Jobs Friday is on deck and the bond market will focus on the change in Average Hourly Wages. The YOY number is expected to hit 2.6%. The higher that number is, the more pressure there will be on pricing.
On the Radar
There are some big name manufacturing reports (Chicago PMI, ISM) as well as President Trump’s State of the Union address this week.
It’s as if everyone returned home after Davos and collectively hedged against higher rates. There were no major economic events today but there was very strong survey results out of the Dallas and Atlanta Fed.
Personal Income and Outlays: Wages and Salaries were a little hotter than expected in December with a 0.5% gain vs estimates of 0.4%. Personal Spending matched expectations with a 0.4% gain. The Fed’s key measure of Inflation, Core PCE YOY, remained at 1.5%, well below their 2.0% target rate.
On Deck for Tomorrow: FOMC Meeting begins, Consumer Confidence, Case Shiller.
The Talking Fed
The Dallas Fed Manufacturing Survey smashed market expectations with a January reading of 33.4 which is the highest level since 2005! This key quote from the survey says it all: “We may not like the way things are communicated and the division in the country, but the policies are improving conditions for the workers and employers. We will be putting our tax savings and costs savings from a reduced regulatory environment back into expanding the business and hiring more people. The U.S. is more competitive internationally, but it’s still far from ideal. We increased salaries and bonuses as a way to retain top talent and hire more quality people. I hope we keep reducing burdensome regulations and start reducing waste, debt, corruption, ineffective programs and the overall size of the government.”
The Atlanta Fed’s latest GDPNOw forecast for the 1st quarter of 2018 came in at a 4.2% rate.