Learn from the Past
Mortgage backed securities (MBS) lost 11 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher for the week. It was a very “choppy” week with an intra-week swing of -96BPS from best to worst backend pricing of the week.
MBS were mostly pressured (higher rates) due to strong jobs data (45 year low) and hawkish commentary by one of the major central banks. While there is a temporary spending bill, the overall downward trend of MBS since January 1 (-187 BPS) kept fixed mortgage rates on an upward trend.
Jobs, Jobs, Jobs
Initial Weekly Jobless Claims hit 221K vs estimates of 232K. The more closely watched 4 week moving average dropped to 224,500 which is a 45 YEAR LOW. The December Job Openings and Labor Turnover Survey (JOLTS) showed 5.811M jobs that are currently unfilled. The market was expecting 5.9M. November was revised upward from 5.879M to 5.978M. The lack of labor slack continues to be a major problem.
We had a brief government shut down in the wee hours of the morning but have since rebooted. The Senate passed their pork-laden bill with ease while the House had a mini rebellion of 67 conservatives voting against the bill. It funds the government only until March 23. It added money and time to defense spending and upped the borrowing authority until 2019. It’s an awful deal that jacks up our deficit but it keeps the doors open for a little longer.
Bank of England kept rates unchanged at 0.5%, and QE flat as expected in a unanimous 9-0 vote. But BOE raised its growth forecast and said, “The Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainability to the target.”
What’s on the Agenda for this Week?
The inflationary data this week (CPI in U.S. and several other key economies) will have a large impact on MBS pricing. Global growth (revised 4th quarter GDP from several countries) will also play a key role. It will need much weaker than expected inflationary readings across the globe for MBS to mount any real comeback. As they moved “another leg down” last week, they may move in this lower channel this week before making “another leg down” in the next week or two.
The three things that have the greatest ability to impact backend pricing this week are: (1) Domestic Flavor, (2) Across the Pond and (3) Geo Political.
(1) Domestic Flavor: Inflation Watch. The biggest event of the week is the CPI report on Wednesday. It is unusual because it is released this week before PPI which is released the next day. It is usually the other way around. This report is expected to show inflation at above 2%. The higher it is, the worse it will be for MBS pricing. There will also be Retail Sales that same day which will be important to watch. Also, with bonds focusing on increased deficits (which are always inflationary), Monday’s Treasury Budget will get a lot of attention as it will be the first budget that has the tax cut in it.
(2) Across the Pond: Besides the Olympics, there is plenty going on overseas. In the order of the largest economies (besides the U.S.): China – Chinese New Year; Japan – GDP; Germany – GDP and CPI; Great Britain – PPI, CPI and Retail Sales; Eurozone – GDP.
(3) Geo-Political: While the bond market is hedging towards global central banks tightening in the near future along with tapering bond purchases, we have our own infrastructure and budget/deficit concerns with the 2019 budget proposal out of the White House.