Learn from the Past
Mortgage backed securities (MBS) lost 102 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week. MBS have now sold off -244 BPS since the start of the year!
The combination of a more “hawkish” tone from the Federal Reserve and very strong manufacturing, wages and jobs data continued to brighten the economic growth outlook. Bonds do not perform well in a growing economy and continued their downward trend that we have seen all year which has meant a steady upward march in fixed mortgage rates.
The Talking Fed
The FOMC voted 9-0 to keep their Fed Fund Rate unchanged at 1.25% to 1.50%.
They had a more noticeably more “hawkish” tone in this statement. In December they said that inflation would “remain somewhat below 2% in the near term.” That is now “Inflation on a 12 month basis is expected to move up this year.”
They also said that:
– Economy to warrant further gradual increases in rates
– Market based inflation compensation gauges rose in recent months
– Gains in employment, spending and investment has been solid
– Janet Yellen’s last day is Saturday, and Jerome Powell will be sworn in on Monday
Jobs, Jobs, Jobs
January Non-Farm Payrolls (NFP): 200K vs estimates of 180K
December NFP revised upward from 148K to 160K
November NFP revised downward from 252K to 216K
The three month rolling average is now 192K!
Average Hourly Wages YOY hit 2.9% vs estimates of 2.6% (increase of 0.75 per hour)
Average Hourly Wage MOM 0.3% vs estimates of 0.3%
Average Hourly Wage is now $26.74
The headline Unemployment Rate remained at 4.1% which matched expectations.
The participation rate remained at 62.7% vs estimates of 62.8%.
The January ISM Manufacturing data was very strong and beat out expectations handily with a 59.1 vs estimates of 58.8 reading. But the real story is ISM Prices Paid which shot up to a crazy 72.7 vs estimates of 68.0.
The January Chicago PMI was very robust and handily beat out expectations with a reading of 65.7 vs estimates of 64.1. Keep in mind that ANY reading above 50.0 is expansionary and readings above 60.0 are crazy hot growth. December’s blockbuster reading of 67.6 was not a fluke or error, in fact it was actually revised even higher to 67.8.
What’s on the Agenda for this Week?
Today’s block-buster ISM services reading will keep the pressure on MBS. However, the uncertainty over a government shutdown should slow the rate/pace of sell-off (but won’t reverse it). So, depending on how the negotiations go, that is how the bond market will go. MBS will either sell off a lot or just a little but the trend will remain intact.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Government Shutdown?, (2) The Talking Fed and (3) Across the Pond.
(1) Government Shutdown: There’s a line in the song “Once in a Lifetime” by the Talking Heads: “same as it ever was, same as it ever was.” Here we go, another deadline this week for a government shutdown. Will we get yet another emergency measure to “kick the can” for another two weeks? Or with the two sides so far apart will we finally get the promised shutdown? Or will there be a miracle and both sides will come to a long-term agreement? Stay tuned…
(2) The Talking Fed: Yellen is gone. Today, Jerome Powell will officially be sworn in as our Fed Chair and the new reign will begin. The bond market views him as a little more pragmatic than uber-dove Yellen. We are awaiting to see who the new Vice Chair will be. Here is a list of speeches this week:
02/05 – Jerome Powell
02/06 – James Bullard
02/07 – William Dudely, Charles Evans, John Williams
02/08 – Robert Kaplan, Neel Kashkari
02/09 – Esther George
(3) Across the Pond: The spotlight will be on the Bank of England’s Central Bank meeting on Thursday. We will also hear from key Bank of Japan and European Central Bank representatives. There will also be some movement in the Brexit situation and key reports out of China.
Treasury Auctions this Week
02/06 3 year note
02/07 10 year note
02/08 30 year bond
Fed Chair Powell…welcome to your first day on the job! He got to witness the stock market tanking by -1500 at one point and a flash crash of bond yields in the late afternoon. The very strong domestic data (ISM) is very negative for pricing and drove MBS lower. Normally, the stock market has no impact on long bonds but you just can’t ignore a -1500 point sell-off after Friday’s -500 point stock market sell-off. After -2000 points, money had to flee somewhere…and that temporary spot is in long bonds. The bad news is that as soon as the stock market rebounds, that money will leave bonds and the gains will go with it.
The Talking Fed: Jerome Powell was installed as our new Fed Chair.
The ISM Non-Manufacturing Index (Services) jumped to a reading of 59.9 vs estimates of 56.2. It was the highest (best) reading in over a decade. The employment component jumped 5 points to a rare reading of 60.0.
On Deck for Tomorrow: Trade Balance, 3 year Treasury auction and JOLTS.
Across the Pond
ECB President Mario Draghi said, “While our confidence that inflation will converge towards our aim of below, but close to, 2 percent has strengthened, we cannot yet declare victory on this front.”