Learn from the Past
Overview
Mortgage backed securities (MBS) lost 50 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher compared to the prior week and actually hit their highest levels of 2018.
MBS prices were under gradual pressure all week (higher rates) as there was a steady dose of very strong manufacturing and production data that showed good economic expansion (which causes rates to move higher). But there was a large spike in rates on Friday in direct reaction to very strong job growth and wage inflation which pushed mortgage rates to their highest levels of 2018.
Jobs, Jobs, Jobs
Big Jobs Friday showed that our labor sector was doing very well with big job gains and an increase in wages.
Tale of the Tape
Jobs:
– October Non Farm Payrolls 250K vs. estimates of 190K.
– September Non Farm Payrolls revised from 134K down to 118K.
– August Non Farm Payrolls revised from 270K up to 286K.
-The more closely watched rolling three month average is now 218K.
Wages:
– Average Hourly Wages YOY moved upward from 2.8% to 3.1% which matched market expectations.
– MOM, Average Hourly Wages increased by 0.2%.
– The national average hourly wage is now $27.30
Unemployment:
– The national Unemployment Rate remained at 3.7% which matched market expectations.
– The Participation Rate increased from 62.7% to 62.9%.
– The October ADP Private Payroll report showed a huge jump of 227K new jobs compared to estimates of 189K. September was revised downward from 230K to 218K.
– Still, October saw the largest increase in 8 months. Small businesses added the fewest with only 29K as they struggle to find talent and/or match higher total compensation from larger corporations. In a separate report, the Q3 Employment Cost Index increased by 0.8% (QoQ) which is the largest quarterly jump since Q4 2017.
Productivity:
– Non-Farm Productivity in the 3rd quarter hit 2.0% vs. estimates of 2.2%. Unit Labor Costs matched market expectations with a 1.2% gain.
Manufacturing:
– The October ISM Manufacturing report was a smidge lower than expected (57.7 vs. estimates of 59.0) but still at a very high level. Internally, the ISM Prices Paid spiked upward to 71.6 vs. estimates of 65.0. The October Chicago PMI was a little lighter than expected (58.4 vs. estimates of 60.0) but still came in at a very robust level. Both Employment levels and Production rose at a fast pace.
Trade Balance:
– The September reading came in at $-54B vs. estimates of $-53.6B.
Factory Orders:
– The previously released September reading was revised upward from 0.5% to 0.7%
What’s on the Agenda for this Week?
Overview
Look for MBS to trade in a +12 to -12 range until after the election results are known.
Three Things
The three areas that have the greatest ability to impact pricing this week are: (1) Mid-Term Elections, (2) The Talking Fed and (3) Geo-Political.
(1) Mid Term Elections: O.K. who else is going to be glad to see all the political TV commercials go away? Regardless of your own political views, the bond market has a very agnostic way of looking at the outcome. The bottom line for bond traders is…will the election results cause the economy to grow at a faster pace, the same pace or reverse course? The very same polling companies (that were completely wrong in 2016) have not really changed how they sample or the demographics that they sample, so there is no real way to use any polling data to hedge ahead of Tuesday’s results. Here are the three possible outcomes and how MBS may react to these outcomes:
– Democrats take both the House and Senate. This would cause MBS to improve (lower rates) as bond traders would see important tax reform, regulatory reforms, etc., get reversed which would slow down the economy.
– Republicans keep both the House and Senate. This would cause MBS to sell off (higher rates) as important economic stimulants would remain in place and may even become permanent along with a new 10% tax decrease for the middle class. It also may mean that there would be a trade deal with China as China has been dragging their feet to see how our mid-terms pan out.
– Republicans keep the Senate and lose the House. This would ensure that any impeachment proceedings started in the House would die in the Senate. How MBS would react would be determined by how much of a majority there is in the House. If it is just barely, then there will not be too much reaction. But if it is a large pickup by the Democrats, MBS may improve a little.
(2) The Talking Fed: There will be a FOMC Interest Rate Decision on Thursday. The bond market is not expecting any rate changes at this meeting as there is no live press conference afterwards. Next year, the markets cannot “game” the Fed as ALL meetings will be live and have a live press conference afterwards which will be nice. The markets are expecting the next time that the Fed may increase rates is in December.
(3) Geo-Political: Expected party and leadership changes in Germany, Great Britain, France and others have markets on edge as well as the future of the Euro with Italy.
Treasury Auctions This Week
11/05 3 year note
11/06 10 year note
11/07 30 year bond
Across the Pond
Germany: Import Prices YOY 4.4% vs. estimates of 4.6%
Canada: Unemployment rate 5.8% vs. estimates of 5.9%