Learn from the Past
Overview
Mortgage backed securities (MBS) lost 17 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to move upward compared to the prior week.
It was a very solid week for economic data with real strength in labor and housing which pressured rates higher. Across the board, the major Central Banks (China, Japan, England) all left their key interest rates alone and did not announce any new policy.
Domestic Flavor
GDP: The 3rd quarter Gross Domestic Product was released (yet again) and it remained at its previously revised rate of growth of 2.1%.
Inflation Nation: The Fed’s key measure of inflation, the Personal Consumption Expenditures ex-Food and Energy on a YOY basis, came in at 1.6% vs. estimates of 1.6%. But the headline PCE YOY was higher than expected – 1.5% vs. estimates of 1.3%. Personal Income MOM was 0.5% vs. estimates of 0.3% and Personal Spending came in at 0.4% vs. estimates of 0.4%.
Consumer Sentiment: The final reading for December’s UofM Consumer Sentiment Index was revised to 99.3 vs. estimates of 99.2.
Jobs: Yet another very strong labor report. The October Job Openings and Labor Turnover Survey (JOLTS) once again showed well over 7M unfilled jobs and beat out market expectations (7.267M vs. estimates of 7.018M).
Taking it to the House:
• November Existing Home Sales set a couple of November records. The median home price was $271,300 which is the highest price on record and months of available inventory hit 3.7 months which is the lowest on record. The total unit sales hit 5.35M which was lighter than expectations of 5.44M, but there was simply not enough inventory to support further sales gains.
• Weekly Mortgage Applications pulled back by -5.0%.
• Refinances fell by -7.0% and Purchase Applications weakened by -2.0%.
• November Building Permits were much better than expected (1.482M vs. estimates of 1.410M).
• SFR permits were up 0.8% to a rate of 918K units. New Housing Starts increased by 1.365M vs. estimates of 1.345M. Again, SFR are looking better by gaining 2.4% for a rate of 938K units, an increase of 1.365M vs. est. of 1.345M.
• The December NAHB Sentiment Index reached a 20 year high with a reading of 76.
What’s on the Agenda for this Week?
Overview
This is a holiday-shortened week that will see very limited volumes. The bond market closes early on Tuesday and reopens on Thursday but most of the traders left Friday after noon and will not return to full force until January 2nd. Look for MBS to tread water and probably make some very small gains but that would take them right into the danger zone and “we don’t float in the danger zone”.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Christmas, (2) Trade and (3) Domestic Flavor
(1) Christmas: Merry Christmas! Since Friday afternoon, bond traders have been heading out for the holiday season. Look for very “thin” volumes all week. The bond market will close early on Tuesday and then reopen on Thursday.
(2) Trade Wars: China has announced a series of tariff cuts on basically everything that they are hurting for (pork, cell phone parts) and are spinning it as a trade concession. There are no scheduled nor expected official announcements on Trade as the two sides try to make it to an early January signing.
(3) Domestic Flavor: There are really no major economic releases that could impact pricing but there is Durable Goods Orders.
Treasury Dump
Treasury Auctions this week:
Today: 2 year note
12/24: 5 year note
12/26: 7 year note
Market Wrap-up
Taking it to the House
November New Home Sales showed an annual gain of 17% from this time last year (719K vs. 615K). On a MOM basis it was up 1.3%.
Inflation Nation
The Chicago Fed National Inflationary Index showed a big turnaround from October’s pace of -0.76 to November’s pace of +0.56. This is a weighted average of 85 indicators.
Treasury Dump
The 2 year note auction was awful, with the lowest (worst) demand in 11 years with a bid-to-cover ratio of only 2.3.
On Deck for Tomorrow
Richmond Fed Manufacturing, 5 year note auction.