Learn from the Past
Mortgage backed securities (MBS) lost 3 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
MBS pricing (and therefore rates) were squeezed by opposing forces. On one side, there was a Fed rate hike and an increase in the projected number of rate hikes for 2019 and 2020. On the other side, there were increasing deficits with the new $1.3T spending bill and concern over a trade war with China and other major economies. This kept MBS stuck in a very tight range all week.
The Talking Fed
The Federal Open Market Committee (FOMC) released their interest rate decision and policy statement on Wednesday. They also released their economic projections.
As expected, the FOMC increased their Fed Fund rate by a 1/4 point. And actually had a slightly stronger outlook compared to December. Here are some highlights:
– Changed the word “solid” as in solid rate of growth to “moderate.”
– Said “Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.”
– Kept their dot plot chart at 3 total rate hikes for 2018 but shifted to more rate hikes in 2019 and 2020.
– 7 out of 15 “dots” (not quite half) still see 4 rate hikes in 2018.
– Upgraded their median 2018 GDP forecast from 2.5% to 2.7%.
– Upgraded their median Unemployment Rate from 3.9% down to 3.8%.
– Kept their core inflation projections at 1.9% for 2018.
During his live Press Conference, the quote that got the attention of bond traders (and sent MBS to their best levels of the day) was “a number of participants reported that about their conversations with business leaders around the country and reported that trade policy has come a concern going forward for that growth.”
The President signed the $1.3T spending bill (after threatening to veto it) that will keep the government funded but only until October.
The original tariffs (which actually don’t legally exist yet) for steel and aluminum have been postponed. But yesterday’s launch of $50B in tariffs on China over stolen IP has China responding with a list of 128 U.S. products that they will have a tariff on.
What’s on the Agenda for this Week?
Cue Kenny Loggins “Danger Zone.” This week continues that trend. It is a holiday-shortened week with the bond market closing early (2 PM) on Thursday and closed on Friday for Good Friday. We’ll get the final revision to the 4th quarter GDP this week but at this point, it’s old data and not a factor in pricing. Thursday’s PCE (the official measure of inflation per the Fed) is expected to remain at 1.7% YOY. Traders are still unwilling to bid up the price in the “Danger Zone.”
The three things that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) Treasury Dump and (3) The Talking Fed.
(1) Geopolitical: While the White House has nailed down a new trade agreement with South Korea, they are working round the clock with China over intellectual property. China’s threat of slapping the U.S. with tariffs on 128 different imports to China is not as important as their “veiled” threat to stop buying up our debt in the form of Treasuries. Scarier still is if they started to dump Treasuries which would drive up global interest rates.
(2) Treasury Dump: The Treasury will auction off $294 billion of bills and notes this week. It’s largest slate of supply ever as the Treasury is attempting to lock down as much debt as they can at slowing rising rates before the rates increase even further which would drive up the service costs on our massive debt that is set to grow even larger with the newly passed spending bill. Here is a list of Treasury note auctions this week, there are also smaller (6-month bills, etc.) that are too short-term to concern bond traders:
03/26 2 year note
03/27 5 year note
03/28 7 year note
(3) Talking Fed: The markets will continue to watch stories that S.F. Fed President Williams will replace Dudley as the NY Fed which is a permanent voting position. Here are the scheduled speeches this week:
03/26 Dudley, Mester
03/27 Bostic, Quarles