Learn from the Past
Mortgage backed securities (MBS) gained 65 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move to their lowest levels not seen since October 2nd.
It was a holiday-shortened week (Veteran’s Day). Our domestic economic data was strong with a good beat in Retail Sales that would have normally pressured rates higher. But concern over the Brexit deal falling apart had money flowing into U.S. bonds as investors moved their cash into safety. The added demand for long bonds drove mortgage rates lower for the week.
The October data was much stronger than expected. The headline Retail Sales number came in at 0.8% vs. estimates of 0.5%, and Ex-Autos, they were 0.7% vs. estimates of 0.5%.
The Talking Fed
Fed Chair Jerome Powell said that he is content with the current state of the economy, and was quick to take credit for the ongoing expansion: “I’m very happy about the state of the economy. Our policy is one reason the economy’s in such a good place right now.” He also confirmed that the tightening process will go on at a “gradual pace,” saying that the Fed is avoiding “hiking too slowly or too fast” and is taking “both sides seriously so is gradually raising rates.”
The number two person at the Fed, Vice Chair Richard Clarida said that rates are nearing the Fed estimates of a “neutral” rate and hinted that a predefined flight path towards a fixed number of rate hikes may not be what the Fed wants and that the Fed is moving back to a “data dependent” view towards the timing of any future Fed action.
The process of Great Britain separating from the European Union has been long and arduous. It also is a major concern for investors as the type of exit will shape trade, banking, migration and more in Europe for decades. British Prime Minister Theresa May submitted a 585 page plan to her cabinet and then basically suffered a mutiny afterwards as it was an awful deal. Multiple key committee heads resigned their position and there were at least 22 letters written from Parliament members of her party asking for a “no confidence” vote putting her time as their leader into question.
What’s on the Agenda for this Week?
This is yet another holiday shortened week. The bond market will be closed on Thursday for Thanksgiving Day and then re-open on Friday only to close early at 2:00. Basically, most bond traders will be gone by mid-Wednesday with very “thin” volumes on Friday. Domestically, there will be a lot of housing news but there are no economic releases that have the ability to impact pricing. MBS will continue to trade at very lofty levels compared to where they have been trading for the past three weeks. Last week, experts expected the 25 day to hold unless the market thought PM May was on the way out…and on Friday MBS did break above the 25 day as it appeared that her own party had enough votes to oust her. But the 100 day is another animal entirely.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Brexit, (2) Trade War and (3) Across the Pond
(1) Brexit: This story will continue to dominate all financial markets. PM May could be voted out, or the cabinet could move to hold yet another referendum vote among the citizens of Great Britain. Or May’s proposal could pass…the uncertainty is very unsettling for the markets.
(2) Trade Wars: Hopes that some sort of incremental agreement between the U.S. and China have fallen by the wayside and markets are now expecting a very long and expensive trade war. Expect a lot of rhetoric between now and the G20 meeting that runs from November 30 to December 1.
(3) Across the Pond: There will be key inflationary readings (CPI) and manufacturing (Markit Flash PMI) from several of the largest economies outside of the U.S. this week.
Talking Feds this Week
11/19 John Williams
11/23 Fed’s Balance Sheet
A very light open to a short week. There were no major economic releases and nothing really new on Brexit or the Trade War fronts. MBS had NO room to improve as they opened just below the overhead resistance…so MBS have just been trading below that resistance line.
Taking it to the House: The November NAHB Housing Market Index came in at 60 which is much lower than October’s reading of 68. Still, ANY reading above 50 is positive. So, this is a very solid reading, it’s just not robust. Future sales expectations showed the largest drop, down 10 points to 65 for the weakest showing since May 2016 with current sales down 7 points to 67 which is the weakest since August 2016. And another low since August 2016 is traffic, down 8 points to 45.
The Talking Fed: NY Fed President John Williams said, “Rates are still very low. We’ve raised them but they are still at a very low level,.” He added, “We want to keep this expansion going as long as possible.” He also made it clear that the Fed is still looking at gradually tightening when he said, “What we’re going to do over the next FOMC monetary policy meeting, we’re going to do what we’ve been doing as best we can – we’re going to find a…gradual path of the monetary policy back to a more normal level of interest rates.”
On Deck for Tomorrow: New Housing Starts, Building Permits, Bank of England Governor Carney speech.