Learn from the Past
Overview
Mortgage backed securities (MBS) gained 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
It was a fairly quiet week with rates holding steady and at very low levels. The biggest economic report of the week (ISM Services) showed solid growth but several key members of the Federal Reserve had speeches which more than indicated that the Fed would stand pat on taking any action in the near term.
Domestic Flavor
ISM Services: The January ISM Non-Manufacturing PMI, representing about 2/3 of our economic output, hit 56.7 vs. estimates of 57.1. It is one of the lower readings in 2 years but still considered very robust since it is above 55.0. Part of the miss is due to the nice upper revision to December from 57.6 to 58.0.
Factory Orders: The November U.S. Factory Orders were lighter than expected (-0.6% vs. estimates of +0.2%) but were a nice improvement over October’s pace of -2.1%.
The Talking Fed
Fed Chair Powell said income inequality and sluggish productivity are the biggest challenges of the next decade but he did not discuss anything new about monetary policy. Dallas Fed President Robert Kaplan said that U.S. interest rates are currently “in the neighborhood” of a neutral level, and the Fed should not be using monetary policy to stimulate the economy, or to slow it, at this point. St. Louis Fed President James Bullard said that the U.S. Federal Reserve’s interest rate increase in December likely tipped monetary policy into slightly restrictive territory, a step beyond the neutral level policymakers had hoped to hit.
What’s on the Agenda for this Week?
Overview
The concern over the presumed government shutdown will provide plenty of support for MBS while any positive momentum in the China trade talks will provide overhead pressure. Barring a deal to prevent a government shutdown, look for MBS to remain in very elevated territory and to remain in the same channel as last week.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) China Trade, (2) Government Shutdown and (3) Inflation Nation.
(1) China Trade: This week, trade talks accelerate with China. U.S. and Chinese officials will continue trade talks this week with a focus on intellectual property which has been the major hurdle so far. Meetings and talks will be held each day this week with higher level discussions happening on Thursday and Friday. There will a swirl of news reports on the progress on these talks. The more positive these talks appear to be, the worse it will be for MBS pricing as a new deal will remove a very large global economic uncertainty as well as kick start trade and growth.
(2) Government Shutdown 2.0: Congressional law makers continue to struggle to find common ground to avoid another government shutdown. They have until Friday to get a deal done but the markets are pricing in that there will not be a deal this week.
(3) Inflation Nation: Both PPI and CPI will be this week. The focus will be on Wednesday’s Consumer Price Index YOY number which came in at 2.2% last time and is expected to remain above 2.0% with a 2.1% reading. Any reading above 2.3% will be negative for pricing; any reading in the 1.9% range or below will be very good for pricing. There will also be some key economic readings with Retail Sales being the second most important release of the week.
The Talking Fed
A few members of the Federal Reserve will speak this week:
02/12 Esther George, Loretta Mester
02/13 Raphael Bostic, Atlanta Fed Business Inflation Expectations
Market Wrap-up
Overview
Once again the ceiling of resistance has been stubborn and has so far held up for the session. It is very quiet in bond-land with no major economic data until Wednesday and nothing really new on the Trade Talks or Government Shutdown situation.
Domestic Flavor
There are no major (or even minor) domestic economic releases today.
On Deck for Tomorrow: FNMA Monthly Bond Coupon Rollover, Fed Chair Powell Speech, JOLTS report.
The Talking Fed
New Federal Reserve Michelle Bowman had her first speech since her new position. She focused on community bank but stayed away from Fed policy.
Across the Pond
Great Britain: Q4 GDP came in at 0.2% vs. estimates of 0.2% on a QOQ basis and 1.3% vs. 1.4% on a YOY basis.