Learn from the Past
Overview
Mortgage backed securities (MBS) gained 25 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the prior week.
It was all coronavirus, all the time last week. Even Fed Chair Powell addressed it in his live press conference. Last Monday, the number of cases were 2,839 and 82 deaths, and this Monday, its 17,388 confirmed cases and 362 deaths. The potential global economic impact is severe and long bonds perform very well (lower rates) when economic outlooks dim.
The Talking Fed
The FOMC kept their key interest rate at 1.75% but did increase their rate on reserves by 5 BPS.
Some key takeaways from the statement and Powell’s live press conference:
• There were only TWO words that changed from the last FOMC statement to this one.
• The vote was unanimous.
• Fed Chair Powell said that they are looking to push inflation higher. “We wanted to underscore our commitment to 2% not being a ceiling, to inflation running symmetrically around 2% and we’re not satisfied with inflation running below 2%.”
• Powell addressed the coronavirus: “We are very carefully monitoring the situation,” and “There will clearly be implications at least in the near term for Chinese output.” Powell said the outbreak of the coronavirus will likely hit the Chinese economy and could spill wider, but it was too early to judge what impact it would have on the U.S.
Domestic Flavor
GDP: The first look at the 4th quarter GDP showed a 2.1% growth rate and matched the market consensus.
Inflation Nation: The Fed’s key measure of inflation came in as expected as the YOY PCE Core (ex food and energy) hit 1.6%. The Headline number missed on the YOY reading (1.6% vs. estimates of 1.7%) but beat on the MOM reading (0.3% vs. estimates of 0.1%). Personal Income rose by 0.2% on a MOM basis vs. estimates of 0.3%. Personal Spending rose by 0.3% which matched expectations.
Manufacturing: The January Chicago PMI was dismal at 42.9 vs. estimates of 48.8.
What’s on the Agenda for this Week?
Overview
That “line in the sand” was tested several times last week for the best pricing since September on growing concern over the coronavirus. But that line held, which is very important to understand. No doubt there will continue to be an escalation in cases, etc., and there will be growing concern over the longer-term impact on the global economy. Look for MBS pricing to remain at very elevated levels as a result but there are some opportunities for some downward pressure.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) China, (2) Geopolitical and (3) Jobs.
(1) China: This will continue to be the dominant force in the marketplace. Today would have normally marked the return to work for millions of Chinese workers as their New Year celebrations and vacations are over. But instead, the country is shuttered with ports and factories closed. We get key economic readings from China (Manufacturing and Services PMIs) which were expected to start to improve now that the phase I trade deal is done. However, those readings will be largely ignored as the coronavirus continues to escalate at an exponential rate. As the Chinese financial markets opened this week, Short-Selling was prohibited but the markets still collapsed on selling in general. The People’s Bank of China has already stepped in with emergency action by injecting 1.2 trillion yuan of liquidity and cut their reverse repo rates by 10 basis points.
(2) Geopolitical: Brexit happened Friday and the markets are looking to see how things unfold there. The U.S. has already pledged a better trade deal with Great Britain than what they had via the Eurozone trade deal with the U.S. to help jump start Great Britain’s economy. Meanwhile, here in the U.S. all eyes are on the Senate’s impeachment trial. Iowa’s primary for the Democratic candidates will also garner plenty of attention.
(3) Jobs: There will be a massive amount of jobs/wage-related data this week. ADP Private Payrolls, Weekly Jobless Claims, Challenger Job Cuts, Unit Labor Costs, Non Farm Payrolls, Average Hourly Earnings and the Unemployment Rate. There will also be key employment data points as internal readings in ISM Manufacturing and Services.
The Talking Fed
Here is this week’s speaking schedule for key Central Bank Figures
02/03 Raphael Bostic
02/05 ECB President Lagarde, Lael Brainard
02/06 Robert Kaplan, Fed Balance Sheet
02/07 Randal Quarles
Market Wrap-up
Domestic Flavor
Manufacturing: Unlike last week’s regional Chicago PMI which showed manufacturing contraction, the national ISM Manufacturing Index for January showed expansion and was stronger than market expectations (50.9 vs. estimates of 48.5). The lower-tier Markit Manufacturing Index also showed expansion (51.9 vs. estimates of 51.7).
Construction Spending: The December reading was lighter than expected (-0.2% vs. estimates of 0.5%) although the prior month was revised upward to 0.7%.
On Deck for Tomorrow: U.S. Factory Orders, Economic Optimism.
Across the Pond
China: Caixin Manufacturing PMI 51.1 vs. estimates of 51.3.
Japan: Jibun Manufacturing PMI 48.8 vs. estimates of 49.3.
Germany: Markit Manufacturing PMI 45.3 vs. estimates of 45.2.
Eurozone: Markit Manufacturing PMI 47.9 vs. estimates of 47.8.
Australia: Reserve Bank of Australia Interest Rate Decision tomorrow.