Learn from the Past
Overview
Mortgage backed securities (MBS) gained 35 basis points from last Friday’s close which caused fixed mortgage rates to move a smidge lower than the prior week.
As expected, the Federal Reserve lowered their key interest rate. However, mortgage rates were unchanged on Fed day. This was a very “hawkish” rate cut as the Fed stated strong economic growth and actually raised their economic projections. The biggest volatility of the week came on Friday on “news” that a Chinese trade delegation would not be touring some American farmer operations when they visit in October. The markets took that as a sign that negotiations were going poorly and caused mortgage rates to improve slightly on a flight to quality.
Taking it to the House
• August Existing Home Sales were stronger than expected with an annualized sales pace of 5.49M units vs. expectations of 5.37M.
• The median sales price rose by 4.7% on a YOY basis and is now $278,000.
• Housing inventory at the end of August decreased to 1.86 million, down from 1.90 million existing-homes available for sale in July, and marking a 2.6% decrease from 1.91 million one year ago.
• Unsold inventory is at a 4.1-month supply at the current sales pace, down from 4.2 months in July and from the 4.3-month figure recorded in August 2018. Properties typically remained on the market for 31 days in August, up from 29 days in July and in August of 2018. Forty-nine percent of homes sold in August were on the market for less than a month.
• Weekly Mortgage Applications were basically flat at -0.1%. Purchase Applications jumped by 6.0% while Refinance Applications fell by -4.0%.
• August New Housing Starts were much stronger than expected (1.364M vs. estimates of 1.250M). SFR rose 4.4% for a rate of 919K. Building Permits also beat out estimates (1.419M vs. estimates of 1.300M). SFR rose by 4.5% to an annualized rate of 866K.
The Talking Fed
You can read the Fed’s official policy statement here.They also released their Economic Projections You can read the official release here.
Here is a summary of their action:
• They lowered their Fed Fund Rate from 2.25% to 2.00%.
• They lowered their Interest Rate on Excess Reserves 30BPS to 1.80%.
• The vote was 7-3 with the 2 dissenting votes wanting NO rate change and 1 dissenting vote for a larger rate cut of 50BPS instead of the 25BPS.
• According to the “dot plot chart” of individual expectations, five members thought the FOMC should have held its previous range of 2% to 2.25%, five approved of the 25 basis point cut but keeping rates there through the rest of the year (which means that 10 out of 17 “dots” see no more cuts this year), and seven favored at least one more cut this year.
• The committee “hung their hat” once again on “the implications of global developments for the economic outlook as well as muted inflation pressures” as the primary rationale for the cut.
• Members actually raised their expectations for growth since the last summary of economic projections in June. The committee now sees GDP rising at a 2.2% pace this year, compared with 2.1% in June, though the longer-run expectations remain at 1.9%.
• Inflation projections were unchanged at 1.8% for 2019 and 2.5% over the longer run.
What’s on the Agenda for this Week?
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) The Talking Fed, (2) Trade/Geopolitical and (3) Economic Flavor.
(1) The Talking Fed: The Federal Reserve held 4 consecutive repo auctions that pumped liquidity into the markets last week and have already started this week with their fifth. A lot of Feds will be speaking this week and the bond market is focused on QE talk. This was due to a snippet of Powell’s live responses where he had an academic discussion that he would rather use the tool of buying assets instead of negative interest rates (both are bad, he just made a choice of the lesser of two evils). But bank after bank and analyst after analyst has run with predicting what QE 4 will look like and when it will hit (and that it will hit even though that is NOT what Powell said).
09/23 Williams, Bullard and Daly
09/25 Evans, George and Kaplan
09/26 Kaplan, Bullard, Clarida, Daly and Kashkari
09/27 Quarles and Harker
(2) Trade Talks: October is fast approaching and the bond markets are focused on any “snippet” of information from the continued “low level” communication between China and the U.S. leading up to the “high level” talks in October. Also, we have Iran/Saudi/Oil and Brexit still all in focus.
(3) Economic Flavor: The biggest domestic economic release of the week isn’t until Friday’s PCE (the Fed’s key inflation gauge). Second-tier releases like Consumer Confidence and Durable Goods will also get some attention. But it’s the wave after wave of continued weak economic news out of Europe and Asia that has bond traders worried that a tsunami of global recession will soon reach our shores.
Treasury Auctions this Week
09/24 2 year note
09/25 5 year note
09/26 7 year note
Market Wrap-up
The Federal Reserve
The Chicago Fed’s National Activity Index was better than expected (+0.10 vs. estimates of -0.35).
New York Fed President John Williams said that the Fed anticipated some developments that were expected to reduce liquidity, including quarterly corporate tax payments and the settlement of Treasury auctions, but said the reaction in the repo market was “outside of recent experience,” but that “we were prepared for such an event, acted quickly and appropriately, and our actions were successful.”
Across the Pond
Germany: Markit Manufacturing PMI 45.6 vs. estimates of 47.3. Services PMI 52.0 vs. estimates of 52.3.
On Deck for Tomorrow
Case-Shiller Home Price Index, FHFA Housing Price Index, Consumer Confidence, Richmond Fed mfg, 2 year Treasury note auction.