Learn from the Past
Mortgage backed securities (MBS) gained just 10 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to remain at or near the same levels as the prior week.
It was a holiday-shortened week with really only three full trading sessions. Long bonds (including mortgage backed securities which are what control mortgage rates) moved sideways. There was some very strong economic data which is negative for rates but very low inflationary data which is positive for rates.
GDP: The 3rd quarter GDP was revised upward from the preliminary release of 1.9% to 2.1%.
Manufacturing: The November Chicago PMI remained in contractionary territory (anything below 50) but was in line with estimates (46.3 vs. estimates of 46.0) and was an increase from October’s reading of only 43.2. October Durable Goods Orders were much stronger than expected (+0.6% vs. estimates of -0.8%). Ex Transportation it was +0.6% vs. estimates of +0.1%.
Inflation Nation: The Fed’s key measure of inflation, PCE Core (ex food and energy) YOY actually moved lower from 1.7% to 1.6%.
Personal Income: PI was flat at 0.0% vs. estimates of 0.3%. Spending did pick up though with a MOM reading of 0.3% vs. estimates of 0.3%.
Consumer Confidence: The Conference Board’s November reading was lower than expected, 125.5 vs. estimates of 126.9.
Taking it to the House: The trailing September 20 Metro City Case Shiller Home Price Index YOY hit 2.1% which matched expectations. The FHFA Housing Price Index MOM showed a gain of 0.6% which beat out forecasts of 0.2%. New Home Sales in October hit 733K vs. estimates of 709K, plus September was revised higher from 701K to 738K.
What’s on the Agenda for this Week?
MBS will/have pulled back to trade below the “danger zone” as Friday’s push was only thin volumes and due to “parking” money over the weekend. That money is now “un-parked” and being put back to work. In order to impact pricing. There will need to be a very weak round of Services data combined with Average Wages below 2.8% on YOY basis as well as China/U.S. trade talks breaking off for MBS to see any real improvement, and that is asking for a perfect storm. Barring that, look for MBS to remain below the danger zone this week.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War(s), (2) Jobs and (3) Manufacturing and Services
(1) Trade War(s): The December 15th deadline is fast approaching for the newest round of Chinese Trade Tariffs. China is pushing not only for those tariffs to be postponed or removed, but also for existing tariffs to be removed as a condition of completing a Phase I trade deal. Meanwhile, President Trump has reactivated steel and aluminum tariffs against Brazil and Argentina due to their massive devaluation of their currencies.
(2) Jobs: There is a ton of job and wage related economic data this week with ADP Private Payrolls, Challenger Job Cuts, Initial Jobless Claims, Non-Farm Payrolls, Unemployment Rate, Participation Rate, Average Work Week and most importantly – Average Hourly Earnings. The market is expecting another reading of 3.0% on a YOY basis. Any reading hotter than that will be negative for pricing.
(3) Manufacturing and Services: There will be very key readings for both manufacturing (1/3 of our economy) and services (2/3 of our economy), with both Markit and ISM releases. Perhaps more importantly, the same data will be issued from China, Germany and the Eurozone.
November Markit Manufacturing Index
This was stronger than expected (52.6 vs. estimates of 52.2) and remained in expansionary territory but the ISM Manufacturing Index came in below 50 which is contractionary (48.1 vs. estimates of 49.2).
This was a big miss. The October data tanked by -0.8% vs. expectations for a gain of +0.4%.