Learn from the Past
Overview
Mortgage backed securities (MBS) gained 21 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at or near the same levels as the prior week.
Fed Chair Jerome Powell and a bevy of other Federal Reserve Governors and Presidents made it clear to the markets that the Fed is in a holding pattern for the near future. Our economic data for the week was tepid, showing growth but not a strong enough pace to concern long bond traders about inflation. The swirling “news” stories about the Chinese trade negotiations received most of the attention from market participants as that process is still “up in the air”.
Domestic Flavor
Retail Sales: The October data was a mixed bag. The Headline MOM reading beat out expectations with a gain of 0.3% vs. estimates of 0.2%. But when you strip out Autos, Retail Sales had a monthly gain of +0.2% which was lighter than expectations of a +0.4% gain.
Inflation Nation: The October Consumer Price Index YOY was a smidge higher than expected (1.8% vs. estimates of 1.7%), and the Core (ex food and energy) was a smidge lower than expected (2.3% vs. estimates of 2.4%). The October Producer Price Index YOY was higher than expected (1.1% vs. estimates of 0.9%), and so was the Core (ex food and energy) 1.6% vs. estimates of 1.5%).
The Talking Fed
Fed Chair Powell gave his testimony on his economic outlook to the Joint Economic Committee. This committee has both Senate and House representatives. You can read his official prepared remarks here.
Overall, it was fairly upbeat. As far as rates and monetary policy, it addressed it by saying “As monetary policy operates with a lag, the full effects of these adjustments on economic growth, the job market, and inflation will be realized over time. We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective.”
What’s on the Agenda for this Week?
Overview
There is simply no data release this week or even on the horizon that has the ability to impact pricing. It’s all Trade, All Geopolitical, all the time right now. We start off Monday with chatter out of China that appears negative on trade and therefore MBS pricing is up to start the week, but it will take just one tweet or news story stating that something has been agreed (or is likely to be agreed to) and MBS will head south.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade Wars, (2) Central Bank Palooza and (3) Geopolitical.
(1) Trade Wars: Confirmation that talks between U.S. Treasury Secretary and our lead trade negotiator with the Chinese lead negotiator on Saturday initially improved trade sentiment. But that looks like it has been dashed as news out of China is that they are frustrated that the U.S. has not agreed to roll back tariffs and are concerned that President Trump will change his mind on the overall agreement.
(2) Central Bank Palooza: The Minutes from the Last FOMC meeting will be released on Wednesday but given Powell’s Economic Testimony last week, there is likely not much probability that there is something in the Minutes that will cause a shift in pricing. Fed Chair Powell, President Trump and Treasury Secretary Mnuchin met at the Whitehouse Monday. The European Central Bank’s newly installed President, Christine Lagarde, will give her first big speech this week since taking office. The People’s Bank of China cut rates on seven-day reverse repurchase agreements by five basis points to 2.50% in its latest show of support for its economy.
(3) Geopolitical: Brexit is front and center stage (literally) as Prime Minister Boris Johnson and Labour leader Jeremy Corbyn, will be on stage for a public Brexit Election Debate on the 19th. China’s crackdown on Hong Kong protestors and their “reeducation” camps on mainland China also will be of concern to the markets.
Market Wrap-up
Domestic Flavor
Taking it to the House: The November NAHB Housing Market Index remains in very high territory, coming in at 70. In October the reading was 71. Any reading above 50 is positive and readings in the 70s are very high.
On Deck for Tomorrow: Housing Starts and Building Permits.
The Talking Fed
Fed Chair Jerome Powell made a visit to the White House today for a meeting with President Trump and Treasury Secretary Steven Mnuchin “to discuss the economy, growth, employment and inflation”, marking the second face-to-face meeting between the world’s two most powerful people. Previously, Powell had dinner with the president in February and the two have spoken only by telephone since.
Brexit
The next general election will be December 12th. The results will determine which political party(ies) will have the most representatives which will determine who the Prime Minister will be and if there will be a Brexit at all.