Learn from the Past
Overview
Mortgage backed securities (MBS) lost 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week. There was a -46 BPS swing from the best pricing of the week to the worst pricing of the week.
It was a holiday-shortened week (Monday closed for President’s day). There were no major domestic economic releases. There were three short term Treasury note auctions (2, 5 and 7 year) that saw lower than average demand and higher rates. The bond market’s only focus was on the Federal Reserve which released the Minutes from their last meeting and their Monetary Policy report.
The Talking Fed
They released the Minutes from the last FOMC meeting. The Fed is confident that the economy is gaining momentum, as a number of participants said they had marked up their growth forecasts since the previous month, encouraged by firm global growth, supportive financial markets and the potential for US tax cuts to boost the economy more than expected. Still, others said the “upside risks” to growth may have increased, according to minutes of their January gathering. Of note is that FOMC voters agreed to add the word “further” in front of “gradual increases” because of the stronger economic outlook.
Fed Chair Jerome Powell submitted the Fed Monetary Policy Report along with his prepared speech in written form to Capitol Hill on Friday. It very much followed the same “hawkish” tone and theme as this week’s FOMC Minutes.
What’s on the Agenda for this Week?
Overview
Have we found a temporary bottom? That is what this week will tell us. This is a very big week for domestic and global events that could shape pricing until March’s Fed meeting. The stronger the revisions to GDP and all the new economic data, the worse it is for pricing and vice versa. Tuesday will be key as this will be Jerome Powell’s first time testifying in front of the House committee and his responses can move the bond market. There is plenty of fear from overseas over Brexit which will help bonds and domestic concerns. A looming trade war (which can slow down our economy) is also providing a lift. But it will take some uncharacteristic “dovish” comments from Powell for MBS to make any meaningful gains.
Three Things
The three areas that have the greatest ability to impact mortgage rates this week are: (1) Fed, (2) Domestic and (3) Across the Pond.
(1) Fed: Fed Chair Jerome Powell will give his first live testimony in the semi-annual monetary policy hearing in front of the House Financial Services Committee on Tuesday and in front of the Senate Banking Committee on Thursday. We already have the Monetary Policy Report that will be used in this meeting. As a result, the bond market will focus on his response to the live questions.
(2) Domestic: After last week’s void of economic data, there will be a lot of big name reports that certainly have the gravitas to move mortgage rates this week. PCE (the Fed’s key measure of inflation) will take center stage, but there are many other reports that get a lot of attention. There is the first revision to the 4th quarter GDP, Chicago PMI and ISM Manufacturing, Consumer Confidence, Consumer Sentiment and Durable Goods.
(3) Across the Pond: China is back after a long Chinese New Year celebration, and they will issue their PMI data. Japan will issue their manufacturing and Unemployment data. But it’s Europe that is in the spotlight with Great Britain’s “Road to Brexit” speech that was delayed from last week and it supposed to give markets more understanding of the timing and structure.
Market Wrap-up
Overview
The stock market had a huge rally (DJIA +399.28).
MBS started on the upswing on dovish comments by Fed James Bullard (who is not a voting member this year) and concerns over weakness in Europe but MBS moved off of their highs after hawkish comments by Fed Randal Quarles (permanent voting member). There were no economic releases that impacted pricing.
Domestic Flavor
Housing: January New Home Sales were lighter than expected (593K vs estimates of 640K). However, the prior two months were revised higher by a combined 25K units.
On Deck for Tomorrow: A very busy economic schedule with Durable Goods Orders, International Trade, Case-Shiller and FHFA Home Price Indexes and Consumer Confidence.
The Talking Fed
Fed Governor Randal Quarles said, “There is a real possibility that some of the factors that have been holding back growth in recent years could shift, moving the economy onto a higher growth trajectory.” And that “It could mean a higher natural interest rate, which would increase the amount of accommodation provided at a given level of the Federal Reserve’s policy interest rate.”
Fed-chair-palooza tomorrow as Yellen and Bernanke speak, which will be very interesting. New Fed Chair Powell will give his first live testimony in front of the House Finance Committee.
Across the Pond
ECB: President Mario Draghi pushed inflation expectations back when he said that the slack in the Eurozone economy may be bigger than previously estimated and this could slow the rise of inflation but only temporarily and prices will eventually climb.
Japan: Leading Economic Indicators hit 107.4 vs estimates of 108.3