Learn from the Past
Mortgage backed securities (MBS) gained 3 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
It was a choppy week with a net swing of -66 BPS from the best pricing (lowest rates) to the worst pricing (highest rates), but when the smoke cleared pricing was basically the same at the end of the week as it was at the beginning of the week. While there were some big name economic reports (ISM/GDP) and Powell’s first testimony in front of Congress, it was the Trump tariff announcement that caused the most volatility.
President Trump announced tariffs on steel and aluminum imports, which concerns traders that it will spark a trade war which may provide some headwinds to our growing economy. The White House has yet to release the specifics but “next week” he will put forth his plan of 10% on aluminum and 25% on steel.
The Talking Fed
Fed Chair Jerome Powell has his first round of semi-annual Monetary Policy hearings, Tuesday in front of the House Financial Services Committee and Thursday in front of the Senate Banking Committee. Here are a few of his statements:
– “Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds.”
– “Inflation remains below our 2 percent longer-run objective. In the FOMC’s view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives. As always, the path of monetary policy will depend on the economic outlook as informed by incoming data.”
– “These interest rate and balance sheet actions reflect the Committee’s view that gradually reducing monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2 percent.”
Overall he did very well in his responses to questions from committee members and kept to the same theme as his prepared remarks. He painted a picture of global growth, tax reform helping the economy, MBS purchases decreasing, concern over the lack of labor slack and concern that we might begin to see rising wages “soon.”
Personal Income and Outlays: Personal Income increased by 0.4% in January which was a tick higher than expected. Personal Spending matched expectations with a monthly gain of 0.2%. The Fed’s key measure of inflation, PCE YOY came in at 1.7% vs estimates of 1.6%. Core PCE YOY matched forecasts with a 1.5% reading.
Manufacturing: February ISM Manufacturing was the best since 2004 with a 60.8 reading which handily beat out estimates calling for a reading of 58.7. ISM Prices Paid jumped to a 6 1/2 year high (74.2 vs estimates of 70.5)
GDP: The first revision to the 4th quarter GDP was issued and it was revised lower from 2.6% down to 2.5% which is exactly what the market was expecting.
What’s on the Agenda for this Week?
To say that this will be a very pivotal week is an understatement. While there will be a lot of jobs and economic data that would “normally” be a primary market mover, actually it will be what is said (and not said) – by the European Central Bank and Bank of Japan, NAFTA negotiations (fallout), and more details and global reaction over fresh new tariffs – that will dominate MBS trades. Two weeks ago, the total net change in MBS pricing for the week was -2BPS, last week it was a net change of +3BPS. That makes a two week total of only +1BPS…which clearly did not support any level of risk taking. During that two-week period MBS made several one-day movements higher only to fail. It certainly looks like they have found a temporary bottom where the two month sell-off has “paused.”
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Geopolitical, (2) Central Bank Palooza and (3) Jobs, Jobs, Jobs.
(1) Geopolitical: The full specifics of the newly proposed tariffs are still not known. The bond market will be focusing on what “waivers” are issued, and to which companies/countries. Also, it is now very clear that tariffs on steel, etc., are being used as leverage on this week’s NAFTA negotiations. Responses from other trading partners and more details from Washington will be closely monitored by bond traders.
(2) Central Bank Palooza: The spotlight is on Thursday’s European Central Bank meeting as the ECB will give their latest interest rate decision and policy statement. Last week, the Bank of Japan surprised markets by hinting at ending QE sooner than expected and on Friday will be the BofJ’s interest rate decision and policy statement. We will also get the Bank of Canada’s interest rate decision and policy statement.
(3) Jobs, Jobs, Jobs: There will be a lot of jobs and wage related data almost each day this week, either as an official headline release or an internal component of another type of economic release. Friday’s YOY change in the Average Hourly Wage data will have more impact on pricing than any other piece of jobs related data.
The Talking Fed
On Wednesday they will issue their Beige Book which is prepared specifically for the March FOMC meeting where it is widely expected that they will raise their Fed Fund Rate.
03/05 Randal Quarles
03/06 William Dudley, Lael Brainard and Robert Kaplan
03/07 Raphael Bostic, Beige Book
03/09 Charles Evans
Strong ISM Services data, with internals showing a red-hot 61.0 in input costs (inflation) along with Fed comments that the “Volker Rule” is likely to be changed in some fashion to allow for more trading, has started the week with MBS selling off but in a very small range.
Services: The February ISM Non-Manufacturing report was very strong, hitting 59.5 vs estimates of 59.0. Any reading above 50 is expansionary and the Services sector accounts for more than 2/3 of our economic engine. So this is a very positive report. Input Prices jumped and hit 61.0.
On Deck for Tomorrow: Factory Orders, Economic Optimism.
The Talking Fed
Fed Vice Chair for Supervision Randal Quarles (voting member) said that regulators want to make “material changes” to streamline and simplify several aspects of the ban on certain bank trading. And said that the Fed are actively considering a significant rewrite of the “Volcker Rule.”
Across the Pond
Eurozone: Retail Sales YOY were higher than expected at 2.3% vs estimates of 2.1%.