Learn from the Past
Mortgage backed securities (MBS) lost 15 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at their best (lowest) levels of 2019 for the fourth week in a row.
There was a very limited amount of economic data that hit, but what did get released was strong. The markets focused on our Federal Reserve and the continued soap opera that is the trade negotiations between the U.S. and China. On the Federal Reserve front, both the Minutes from the last Fed meeting and live speeches from Fed Chair Powell and numerous district Fed Presidents made it clear that the Fed is not on a predefined path to lower their Fed Fund Rate (which are NOT mortgage rates).
The Talking Fed
Fed Chair Jerome Powell spoke at the Fed’s Jackson Hole WY Economic Symposium. You can read the official release here.
Here are few key highlights from his speech:
• He said, “based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.”
• He cited/highlighted three negative developments since the last FOMC meeting: New tariffs on China and from China; further evidence of a global slowdown, notably in Germany in China; and a sharp downward move of long-term bond rates around the world “to near post-crisis lows.”
• U.S. economy has continued to perform well overall
• Monetary policy cannot provide settled rulebook for trade
The Minutes from the last FOMC meeting were issued, where the Fed cut their interest rate by 1/4 point but saw 2 dissenting votes, which is rare. You can read the official release here.
Here are a few key highlights from the Minutes:
• 2 voting members voted for NO rate decrease.
• 2 voting members wanted a LARGER decrease from -25 to -50 basis points.
• The Fed Minutes confirm that “most Fed officials see the July rate-cut as a ‘mid-cycle adjustment’ and not the beginning of an epic easing cycle that investors are demanding.
• The rate cut was not to boost the economy but to mitigate risk.
• Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective as the most likely outcomes.
• A number of participants observed that overall inflation had continued to run below the Committee’s 2% objective, as had inflation for items other than food and energy.
• More QE? “The Committee could proceed more confidently and preemptively in using these tools in the future if economic circumstances warranted.”
Taking it to the House
Weekly Mortgage Applications were basically flat with a small net change of under 1%. Refinance Applications improved by 0.4% but Purchase Applications fell by -4.0%. The July Existing Home Sales report was very strong with 5.42M units on an annualized basis vs. estimates of 5.39M. It also marks the first time in 17 months that the YOY data was on the plus side.
What’s on the Agenda for this Week?
A lot of the global and economic issues are impacting backend pricing. Bottom line is MBS pricing is expected to remain within the same intra-day trading channel that they have been stuck in for the past 4 weeks. There are some heady economic reports to digest and the soap opera that is the Trade War will continue to cause some daily fluctuations. There really isn’t much out there that could cause MBS to break above the channel for real net tangible improvements in pricing and there is strong support at the 50 day moving average which limits any real downside. A significant (and real) truce or agreement between China and the U.S. is the only thing right now that can break MBS out of this channel…and it would break to the downside for worse pricing.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade Wars, (2) Domestic Flavor and (3) The Talking Fed
(1) Trade Wars: The next round of tariffs is set to into place on Monday, September 1. Leading up to this date, there have been a lot of recent developments. Last Friday (August 23rd), China’s Ministry of Finance said that it would levy retaliatory tariffs on another $75 billion in US goods with rates anywhere between 5% and 10%, with the tariffs set to be implemented in two batches, one at midnight on September 1 and another at midnight on Dec 15. Additionally, China said it would resume 25% tariffs on US autos. In response, the U.S. has said that starting on October 1, the existing 25% tariffs on $250 billion in Chinese goods would rise to 30%, and the 10% tariffs on $300 billion in Chinese goods set to begin on September 1 will be 15%.
(2) Domestic Flavor: This is a very big week for economic data that matters and has the gravitas to move the needle on backend pricing. The Core YOY PCE (the Fed’s key inflation gauge) will hit on Friday and is expected to rise from 1.6% to 1.7%. There will also be the first revision to the previously released GDP from the second quarter: Durable Goods Orders, Consumer Confidence, Consumer Sentiment and Chicago PMI.
(3) The Talking Fed: When you combine all the speeches from Jackson Hole, WY last week (including Powell’s) and you take those speeches at face-value, then the Fed is clearly saying that the markets are wrong in pricing in at least a 100 basis point reduction in their Fed Fund rate by the end of the year. As their September meeting fast approaches, any Fed commentary will get a lot of attention.
Treasury Auctions this Week
08/27 2 year note
08/28 5 year note
08/29 7 year note
Durable Goods: The July Durable Goods Orders were much stronger than expected (2.1% vs. estimates of 1.1%) and beat out June’s pace of 1.9%. Overall, a solid report. Non Defense Capital Goods Orders Ex-Aircraft hit 0.4% vs. estimates of a contraction of -0.1%. The only weak spot in the report was the Durable Goods Ex Transportation which fell by -0.4% vs. estimates of 0.1%.
On Deck for Tomorrow
Consumer Confidence, Richmond Fed Manufacturing, Case- Shiller Home Price Index, FHFA Home Price Index, 2 year Treasury Note Auction, Germany GDP