Learn from the Past
Mortgage backed securities (MBS) gained 9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
MBS sold off for much of the week on higher inflationary data (bonds hate inflation) but there was a temporary bounce on Friday due to parking over the long holiday weekend with the world’s two largest economies shut down (U.S. and China).
Inflation? You Bet
The Consumer Price Index readings for January were higher than expected with the Headline YOY CPI hitting 2.1% vs estimates of 1.9% which is a big beat. Core (ex-food and energy…everything that actually matters) CPI YOY increased by 1.8% vs estimates of 1.7%. The Producer Price Index readings for January were double than expected when looking Core PPI MOM (0.4% vs estimates of 0.2%). The YOY PPI Headline data hit 2.7% vs estimates of 2.5%.
In another inflationary report, Import Prices, MOM jumped by 1.0% vs estimates of 0.6% and the prior month was doubled from 0.1% to 0.2%. YOY, Import Prices were up by 3.6% vs estimates of 3.0%.
The headline data was disappointing. January was lighter than expected (-0.3% vs estimates of +0.2%), plus December was revised lower from 0.4% down to 0.0%. When you strip out Autos, Retail Sales were flat at 0.0% vs estimates of a gain of 0.4%.
The NAHB Sentiment Index remained at 72 which is an extremely high reading and was not impacted by rising mortgage rate expectations. New Housing Starts in January were much higher than expected with 1.326M vs estimates of 1.234M. Building Permits were also stronger than expected (1.396M vs estimates of 1.300M). SFR were basically at the same pace as the prior month; the beat was due to a surge in Rental Properties which is not good news for the housing market.
Jobs, Jobs, Jobs
Initial Weekly Jobless Claims matched expectations with a low 230K reading. The more closely watched 4 week moving average is still below 230K with a 228,500 reading.
Their February Business Outlook Survey jumped to an extremely high reading of 25.8 which handily beat out expectations of 21.1. New orders, at 24.5, are surging and unfilled orders, at 14.5, are piling up fast. Hiring is so far keeping up, at 25.2.
The Preliminary February University of Michigan’s national survey was red hot with a reading of 99.9 vs estimates of 95.5. The one year inflation expectations were at 2.7%, the 5 to 10 year outlook was at 2.5%.
What’s on the Agenda for this Week?
It’s a holiday-shorted trading session this week. The trend is still for downward pressure on long bonds. The Fed will be the major driving force this week. The bond market will focus on discussion regarding growth as well as the impact of Tax Reform which really was even in effect when the last Fed meeting happened. Experts don’t expect a trend reversal this week.
The three areas that have the greatest ability to impact back end pricing this week are: (1) The Talking Fed, (2) Across the Pond and (3) Treasury Glut
(1) The Talking Fed: The Minutes to Janet Yellen’s last FOMC meeting in January will be issued where they voted unanimously to not raise rates at that time. But there will also be new Fed Chair Powell’s testimony and the Fed Monetary Policy Report on Friday which will be very key. We also hear from a lot of voting members with the March FOMC meeting coming soon:
02/21 Harker, FOMC Minutes
02/22 Kashkari, Quarles, Dudley, Bostic
02/23 Powell – Monetary Policy Report, Williams, Dudley, Mester
(2) Across the Pond: There will be very key speeches from Central Bank members as well as some very big economic releases.
Japan: Nikkei Manufacturing, Bank of Japan Funo speech, CPI
European Central Bank (ECB): Non-Monetary Policy Meeting, Consumer Confidence, ECB Monetary Policy Accounts, CPI
Great Britain: Unemployment Rate, Bank of England Carney Speech, GDP
(3) Debt, Debt and more Debt: We will dump more of our debt into the saturated market place this week so we can continue to fund our deficit. These are all short-term notes and they will swap out old debt at lower rates into new debt at higher rates.
02/21 2 year Treasury note
02/22 5 year Treasury note
02/23 7 year Treasury note
As expected, a real “yawner” with no upside to pricing as there were no major economic events today and the market is awaiting Wednesday’s release of the Minutes of the last FOMC meeting.
Treasury Note Auction: Today’s 2 year short term note auction was a C+ at best. $28B went off at a high yield of 2.255% which is the highest that has been paid at auction since 2007. Demand was soft too with the bid-to-cover ratio falling from 3.22 in January down to 2.72 at this auction.
On Deck for Tomorrow: Weekly Mortgage Applications, Existing Home Sales, 5 year Note auction and the FOMC Minutes.
Across the Pond
Germany: PPI was higher than expected with MOM at 0.5% vs estimates of 0.3% and YOY 2.1% vs estimates of 1.9%. So there is a ” 2 handle” on a European inflation gauge.
Eurozone: The Prelim Consumer Confidence hit 0.1 which was a huge miss compared to expectations of 1.0%