Learn from the Past
Mortgage backed securities (MBS) gained 23 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the previous week.
It was a holiday-shortened week (New Year’s) with only three full trading sessions that saw lighter volumes until Friday. MBS were on the move upward (and therefore mortgage rates were on the move downward) over concerns about the unknown duration of the partial government shutdown and the transition of the House of Representatives to Democratic control and what that might mean for future tax and regulatory policies. But MBS sold off (and mortgage rates rose) after a very robust jobs report on Friday.
The jobs report was very strong! Tale of the Tape:
– December Non-Farm Payrolls (NFP) was much higher than expectations 312K vs. estimates of 177K.
– November NFP revised higher from 155K to 176K.
– October NFP revised higher from 237K to 274K.
– The more closely watched 3 month rolling average increased to a staggering 254K.
– December Average Hourly Earnings increased to $27.48. That is a YOY gain of 3.2% vs. expectations of a 3.0% gain.
– Average Hourly Earnings on MOM basis improved by 0.4% vs. estimates of 0.3% and is double the 0.2% pace in November.
– The Unemployment Rate increased from 3.7% to 3.9%. The market expected 3.7%.
– The Participation Rate increased from 62.9% to 63.1%
The December national ISM Manufacturing Index was a big miss. Coming in at only 54.1 vs. estimates of 57.9. While this is still well above 50.0 which is expansionary, it is much lower than expected. ISM Prices Paid dropped to 54.9 vs. 60.7 in November showing little to no inflationary pressure on the manufacturing side.
The Talking Fed
Fed Chair Jerome Powell and former Fed Chairs Janet Yellen and Ben Bernanke had a cozy panel meeting for the press. Powell made it clear that he would not resign if he were asked to step down and that all Fed Chairs have met with the President during the tenure and he expects to as well but the Fed will remain independent from political influences. He also emphasized that there is no “preset path” for raising rates or adjusting the balance sheet and that they are data dependent. Currently, the economy and labor market are in strong shape.
What’s on the Agenda for this Week?
This is the first full week of trading in two weeks. After setting the record for the highest MBS price for 2019 last week, can MBS make a move even higher or has a new upper limit been set? The domestic economic data (most notably ISM Services and CPI) will take a back seat and have a very limited impact on pricing as Trade and The Talking Fed will drive MBS pricing all week. Will the uncertainty over Trade and the future path of rate hikes become clearer? If so, MBS will lose some of their shine but if those areas of concern continue to drive international investors to park their money in the U.S., then MBS will continue to enjoy fantastic pricing.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade Wars, (2) The Talking Fed and (3) Geo-Political.
(1) Trade Wars: Trade negotiations between U.S. and Chinese officials take place today and tomorrow in Beijing in the hope of reaching a deal during a 90-day truce between President Trump and Xi Jinping. But China is not the only trade story as the U.S. will be meeting with the EU Trade Commissioner on Wednesday and Japan’s Trade Minister this week as well.
(2) The Talking Fed: There is a big schedule for talking Feds this week which includes the minutes from the last FOMC Meeting where they “dovishly” increased their Fed Fund rate and we hear from Fed Chair Jerome Powell.
01/07 Raphael Bostic
01/09 Charles Evans, Eric Rosengren, FOMC Minutes
01/10 Tom Barkin, James Bullard, Charles Evans, Neel Kashkari, Richard Clarida and Jerome Powell
(3) Geopolitical: Front and center is Brexit as the UK Parliament resumes debating the Brexit Withdrawal Bill. Of course, our own partial government shutdown and negotiations on that will also be grabbing headlines.
Treasury Auctions this Week
01/08 3 year note
01/09 10 year note
01/10 30 year bond
While the ISM data was a smidge lighter than expected, it was still VERY strong. Just after the 10am release of that data, MBS were pressured down to the bottom of the trading channel. But it was still was a very small move and MBS pricing is still at very elevated levels as the bond market awaits some of the geo-political events to shake loose.
ISM Non-Manufacturing: The Servicing sector accounts for more than 2/3 of our economic output, so this reading is much more important than the ISM Manufacturing reading last week. The December release came in very close to market expectations (57.6 vs. estimates of 59.0). Any reading above 50 is expansionary, readings above 55 are very strong, and readings above 60 are robust. The market has been used to readings in the upper 50s and low 60s in the last 12 months which is incredibly strong. New orders added 2 tenths to November’s score for 62.7 in December which, next to 63.2 in June last year, is the highest in 8 years. And importantly, orders are getting a boost from foreign demand as new export orders rose 2 points to 59.5. Employment slowed, down 2 points to a still very healthy 56.3 which contrasts, however, with the enormous payroll surge in last week’s employment report from the Labor Department.
Factory Orders: This scheduled economic release did not happen due to the partial government shutdown.
On Deck for Tomorrow: Small Business Optimism Index, JOLTS, Consumer Credit and a 3 year Treasury note auction.
The Talking Fed
Atlanta Fed President Raphael Bostic (non-voting member) said his business contacts appear less confident about the coming months, while “clouds” have developed overseas and that he is at “one (rate) move for 2019.”
China and the U.S. started two days of face-to-face trade negotiations today but no new agreements have been “floated.”
President Trump has announced that he will address the nation at 9PM to discuss the Humanitarian and National Security Crisis.
Across the Pond
Germany: Retail Sales 1.4% vs. estimates of 0.3%
Eurozone: Retail Sales 0.6% vs. estimates of 0.1%