Learn from the Past
Overview
Mortgage backed securities (MBS) lost just 1 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to remain unchanged from than the prior week.
Mortgage rates moved sideways as speculation and sentiment towards a trade deal with China pressured rates higher while offsetting that was the uncertainty of a potential impeachment that pressured rates lower. These two opposing forces squeezed rates to move sideways.
Domestic Flavor
Inflation Nation: The Fed’s key measure of inflation, Core PCE YOY matched market expectations with a 1.8% reading in August. The pace was 1.7% in July. The headline PCE was 1.4% vs. estimates of 1.3%.
Income and Spending: Personal Income continues to grow, this time by 0.4% in August. Personal Spending grew by 0.1% which was below estimates of 0.3%.
Durable Goods: The August Headline Durable Goods Orders was better than expected (0.2 vs. estimates of -1.2). Ex Transportation it grew at 0.5% vs. est. of 0.2%.
Consumer Sentiment: The final reading for the September UofM Consumer Sentiment Index was revised higher from 92.0 to 93.2
Taking it to the House: August Pending Home Sales MOM were much better than expected with a 1.6% vs. estimates of 0.9%. YOY they came in at +2.5% vs. estimates of -1.9% which is a huge beat. Weekly Mortgage Applications decreased by 10.1% led by a big drop of -15.0% in Refinance Applications. Purchase Applications were more level at -3.0%. New Home Sales in August shot up and beat out estimates (713K vs. estimates of only 660K).
Gross Domestic Product: The third and final release of the 2nd quarter GDP remained at 2.0% which was widely expected. The Price Index was revised higher from 2.5% to 2.6%, the markets were expecting it to be revised lower to 2.4%.
What’s on the Agenda for this Week?
Overview
The channel has been “money” for the past three weeks and the upper resistance and lower support is once again expected to hold up nicely which means that floating near the top of the channel continues to be very risky and not advised by experts. It will take a very weak round of economic data (especially wages on Friday) for MBS to close above the channel.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War, (2) The Talking Fed and (3) Domestic Flavor.
(1) Trade War: China will be closed for their “National Day” this week, so any direct trade commentary out of China is unlikely and the market will then focus on our domestic tweets and reports on trade negotiations.
(2) The Talking Fed: There is a “deluge” of Fed speakers this week, including Fed Chair Powell:
10/01 Charles Evans, Richard Clarida, James Bullard, Michelle Bowman
10/02 Patrick Harker, John Williams
10/03 Charles Evans, Randal Quarles, Loretta Mester, Richard Clarida
10/04 Eric Rosengren, Raphael Bostic, Jerome Powell, Lael Brainard, Randal Quarles, Esther George
(3) Domestic Flavor: This is a monster week for big name economic releases that have the “gravitas” to actually move pricing.
Chicago PMI and ISM Manufacturing will give a good idea on the manufacturing sector. There is a concern that the sector has been contracting but the market is expecting readings that show expansion.
The ISM Services data is also expected to show expansion. There is a ton of jobs related data with ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Non Farm Payrolls, Unemployment Rate and Average Hourly Earnings. YOY Earnings will get the most attention from bond traders.
We will hear from the “whistleblower” that is at center of the recent impeachment inquiry.
Market Wrap-up
Domestic Flavor
Manufacturing: The bellwether Chicago PMI was much weaker than expected in September (47.1 vs. estimates of 50.4). Any reading below 50 is contractionary. However, the Dallas Fed Manufacturing Index was much stronger than expected (+1.5 vs. estimates of -2.3).
Across the Pond
China: Caixin Manufacturing PMI 51.4 vs. est. of 50.2.
Germany: Retail Sales 0.5% vs. estimates of 0.6%, Unemployment Rate 5% vs. estimates of 5%.
Great Britain: GDP YOY 1.3% vs. estimates of 1.2%.
On Deck for Tomorrow
ISM Manufacturing, Construction Spending and four talking feds, Reserve Bank of Australia Interest Rate Decision.