Learn from the Past
Mortgage backed securities (MBS) lost just 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the prior week. MBS (which directly controls mortgage rates) moved in a very narrow range, testing a key technical support level located at the 100 day moving average all week. This kept mortgage rates nice and steady for the week.
Retail Sales: The headline reading for September was much lower than expected (-0.3% vs. estimates of +0.3%). Part of that miss was due to an upward revision to August from 0.4% to 0.6%. When you strip out Autos, Retail Sales were down -0.1% vs. estimates for a gain of 0.2%. August was revised higher from 0.0% to 0.2%.
Taking it to the House: Weekly Mortgage Applications increased by just 0.5%. Refinance Applications popped by 4.0% but Purchase Applications tanked by -4.0%. The October NAHB Housing Market Index hit 71 vs. estimates of 68. September New Housing Starts were lighter than expected (1.256M vs. estimates of 1.320M) but the weakness was in multifamily. The key housing market SFR actually made gains to 918K on an annualized basis. Building Permits were stronger than expected (1.387M vs. estimates of 1.335M). SFR permits rose to 882K.
The Talking Fed
Tthe Fed’s Beige Book was issued on Wednesday. You can read the official release here.
Here are a few key highlights:
• The economy expanded at a slight to modest pace since the prior report
• Household spending was solid on balance.
• Employment rose slightly amid reports of persistent worker shortages. Labor market tightness across skill levels and occupations was widely cited as a factor restraining hiring.
• Wages rose moderately in most districts, with upward pressure noted for lower-skill workers in the retail and hospitality industries and for higher-skill professional and technical workers.
• Agricultural conditions deteriorated further due to the ongoing impacts of adverse weather, weak commodity prices, and trade disruptions.
What’s on the Agenda for this Week?
Brexit is the key today as the markets are waiting to see if a vote can pass today or tomorrow. If Brexit passes, then look for MBS to sell off in reaction. Thursday’s European Central Bank (ECB) meeting is also very key and their action may change based upon a Brexit passage as well. There are no economic reports this week that can impact pricing, so it’s all Brexit, ECB and Trade War this week.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Brexit, (2) Central Bank Palooza and (3) Trade War
(1) Brexit: Last week, the EU Council accepted British Prime Minister Boris Johnson’s latest deal and Johnson now needs to get his own Parliament to pass it. He was unable to do that over the weekend, falling short by just nine votes. It looks like he thinks he now has the votes and is looking to have another vote on Monday; however, he faces procedural challenges with the vote.
(2) Central Bank Palooza: The ECB will meet on Thursday and release their latest interest rate decision and policy statement. This will be the last ECB meeting before Christine Lagarde takes over as ECB President on November 1. She has just recently been the head of the IMF.
(3) Trade War: The China trade talks will continue this week with National Economic Council member Larry Kudlow saying that the December 15th round of tariffs could be postponed or even withdrawn if the talks continue to go well. Meanwhile, China’s state-run Xinhua News Agency reported that Vice Premier Liu He told a conference in the southern city of Nanchang that the most recent trade talks with the U.S. made “substantial progress.”
10/22 2 year note
10/23 5 year note
10/24 7 year note
There were no domestic economic releases today.
On Deck for Tomorrow: Existing Home Sales, Richmond Fed Manufacturing Index, 2 year note auction.
Across the Pond
Central Bank Palooza: The Peoples Bank of China kept their key interest rate at 4.2%.
Trade War: China’s state-run Xinhua News Agency reported that Vice Premier Liu He told a conference in the southern city of Nanchang that the most recent trade talks with the U.S. made “substantial progress.”
Brexit: No vote yet as the UK Parliament’s Speaker Bercow blocked a new vote on the Brexit deal by citing a parliamentary rule dating back to 1604 under which the government cannot repeatedly ask Parliament to vote on the exact same motion. So the Brexit Deal Bill is temporarily thwarted but they will go ahead and vote on the No Deal Bill tonight as that is a new Bill.
Japan: All Industry Activity Index 0.0% vs. estimates of -0.1%.
Germany: PPI YOY -0.1% vs. estimates of -0.3%.