Learn from the Past
Mortgage backed securities (MBS) gained 30 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the prior week.
It was a holiday-shortened week that didn’t have any meaningful economic releases and the Central Banks across the board kept their interest rates the same. The big push up in pricing (lower rates) occurred Thursday and Friday due to escalating concern over the Coronavirus spread and its longer-term impact on China’s economy as well as other economies.
Central Bank Palooza
The European Central Bank kept their key interest rate at 0.0% and their deposit rate at -0.5% and have announced that for the first time since 2003 they will begin a complete review of their economic policies: kept their key interest rate at 0.0% and their deposit rate at -0.5% and have announced that for the first time since 2003 they will begin a complete review of their economic policies.
The Bank of Canada kept their key interest rate at 1.75%. The Bank of Japan (3rd largest economy) kept their key interest rate at -0.1%. On Monday (bond market was closed), the People’s Bank of China (2nd largest economy) kept their key interest rate at 4.15%.
Taking it to the House
After surging over 30% two weeks ago, Weekly Mortgage Applications fell by 1.2% last week. Both Purchase and Refinance Applications fell by 2.0%. The November FHFA Home Price Index showed a MOM gain 0.2% of vs. estimates of 0.2%. December Existing Home Sales hit 5.54M vs. estimates of 5.43M.
What’s on the Agenda for this Week?
When you look at what has been propping up MBS pricing, the question is: will there be any decrease in fear? On the Coronavirus, that situation is only going to spiral upward causing global money to flow into bonds.
On the Brexit front, it is happening on Friday and it’s a big unknown on how that will pan out.
On the Impeachment front, the threat of calling certain witnesses has the markets on edge.
It looks like the “big three” will likely not a see a reduction in fear which means MBS prices will be propped up this week. The Fed has made it clear that they will be in a neutral stance here and probably for the rest of the year so unless there is a huge bombshell out of Wednesday’s meeting, they will have little impact on pricing. There is some heady economic data this week and it will have the gravitas to move pricing but impact will be muted by the Coronavirus.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geopolitical, (2) Central Bank Palooza and (3) Domestic Flavor.
(1) Geopolitical: The big three are the Coronavirus, Brexit and Impeachment. The numbers for the Coronoavirus keep exponentially rising. The week started off with the “official” number of recognized cases as near 3,000. However, a personal video made by a nurse that has been at ground-zero (WuHan) since the start said that locally, it’s at least 9,000. Key medical centers have it pegged closer to 25K nationwide. Regardless, with an incubation period of about 14 days and over 5 million Chinese traveling prior to the travel ban, global experts expect numbers to continue to rise globally. The Chinese have already announced that factories will be shut down for at least 10 days. So you have Chinese consumers holed up and not buying anything and you have factories not producing anything which will be a large drag on the world’s second largest economy. On the Brexit front, Friday January 31st is the big date where this will finally happen. On the Impeachment front, financial markets will not respond well with risk of an actual impeachment moving higher.
(2) Central Bank Palooza: The key will be this Wednesday’s FOMC meeting. The market is not expecting (and it has been well telegraphed by the Fed) that they will not be making any policy nor rate changes at this meeting. However, their discussions on the balance sheet will be key. The Bank of England will also issue their interest rate decision.
(3) Domestic Flavor: There are some very big economic releases this week that will get plenty of attention from bond traders. The biggest will be the preliminary release of the 4th quarter GDP which is expected to remain above 2%. There will also be the Core PCE YOY reading (which is THE key measure of inflation), Durable Goods Orders, Consumer Confidence and Chicago PMI.
The following are the Treasury auctions this week.
01/27 – 2 year note, 5 year note
01/28 – 7 year note.
Taking it to the House: December New Home sales missed the mark (694K vs. estimates of 730K) and November was revised lower from 719K to 697K.
On Deck for Tomorrow: Durable Goods Orders, Case-Shiller Home Price Index, Richmond Fed Manufacturing, Consumer Confidence and a 7 year note auction.
There were two shorter term Treasury note auctions, and both the 2 year and 5 year auctions were tepid at best.
Zombie Plague: Confirmed cases hit two more countries to bring the total countries so far to 17. China is by far still the leader with 82 deaths, including a new one in Beijing and 2,839 confirmed cases, but there are said to be around 20K of cases that are still being evaluated.