Learn from the Past
Overview
Mortgage backed securities (MBS) lost just 2 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 and were squeezed sideways for the week. The economic news was not that great which would normally have helped rates out but positive momentum on Trade and Brexit kept rates in check.
Domestic Flavor
Taking it to the House: The September New Home Sales matched market expectations at 701K. The August FHFA Housing Price Index showed a MOM gain of 0.2% vs. estimates of 0.4%. Weekly Mortgage Applications fell by -11.9%. Refinance Applications tanked by -17.0% and Purchase Applications pulled back by -4.0%. Existing Home Sales for September came in at 5.38M vs. estimates of 5.45M. Even though mortgage rates have been incredibly low, the culprit is lack of inventory as prices keeping moving higher as the Median Sales Price is up 5.9% YOY to $256,900. Unsold inventory is only at a 4 month supply and properties remained on the market for only 32 days.
Durable Goods: The Headline September Durable Goods Orders were much weaker than expected (-1.1% vs. est. of -0.8%). When you strip out Transportation, it was also a miss but less pronounced (-0.3% vs. estimates of -0.2%).
Central Bank Palooza
There were no surprises from the European Central Bank as they kept their key interest rate at 0.0% and their deposit rate at -0.5%. They also kept the QE-Infinity in place that they announced two meetings ago. The Peoples Bank of China kept their key interest rate at 4.2%.
What’s on the Agenda for this Week?
Overview
A fed rate cut of 25 BPS by itself is not something that will improve pricing this week. There will need to be some very weak GDP and PCE data as well as some fallout on the Trade front for MBS to close convincingly back above the 100 day moving average. This could be a very fluid and volatile week. Barring any major surprises, though, MBS will continue to trend below that 100 day which is not supportive of floating.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bank Palooza, (2) Jobs and (3) Domestic Flavor.
(1) Central Bank Palooza: Our own Federal Reserve will start two days of meetings on Wednesday which will conclude with their Interest Rate Decision and Policy statement. Fed Chair Powell will also hold a live press conference but economic projections (dot plot) will not get updated at this meeting. The market has priced in a rate cut of 25 BPS. The Bank of Canada and the Bank of Japan are both expected to keep their key policies at current levels.
(2) Domestic Flavor: There is a lot going on this week. The biggest release (other than Friday’s Jobs deluge) is Wednesday’s first release of the 3rd quarter GDP. The market is expecting a range of 1.7% to 1.8%. Any reading at or above 2% would be very negative for pricing. On Thursday the Fed’s key inflation index (PCE) will be released. Also released will be two key readings on Manufacturing (Chicago PMI and ISM Manufacturing). Both have been trending below 50 which is contractionary.
(3) Jobs: There will be a deluge of jobs and income related data this week with ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims and Personal Income. But Friday’s BLS Jobs report will get the most attention but likely to get a “pass” as both the Non Farm Payrolls and the Unemployment Rate are expected to soften due to the GM Strike. Average Hourly Earnings will continue to be the primary focus of bond traders.
Market Wrap-up
Domestic Flavor
Wholesale Inventories: The Prelim August reading hit -0.3% vs. last of 0.0%.
Dallas Fed Manufacturing: The October reading was much weaker than expected (-5.1 vs. estimates of +1.4).
Trade Balance: The Trade Deficit in September was a little better than August (-70.39B vs. last of -73.06B).
On Deck for Tomorrow: Case Shiller Home Price Index, Consumer Confidence, Pending Home Sales, FOMC Meetings Start.