Learn from the Past
Mortgage backed securities (MBS) lost just 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the prior week.
The U.S. had a very strong week for economic data with better than expected readings across the board in Manufacturing, Services and Labor. This would normally be very negative for mortgage rates but the growing concern over the Coronavirus and the potential hit to the Chinese and global economies more than offset the positive economic data out of the U.S.
Jobs: It was Big Jobs Friday! And the numbers were hot. Tale of the Tape:
Non Farm Payrolls January 225K vs. est. of 160K
Non Farm Payrolls December revised upward from 145K to 147K
Non Farm Payrolls November revised upward from 256K to 261K
The rolling three month average is now a robust 211K!
The average hourly rate rose by 7 cents to $28.44
The Average Hourly Rate MOM increased by 0.2% vs. December’s pace of 0.1%
YOY, wages increased by 3.1% vs. December’s pace of 3.0% (upwardly revised from 2.9%).
The headline Unemployment Rate rose from 3.5% to 3.6%
The U6 Underemployment Rate is 6.9%
The Participation Rate moved higher from 63.2% in December to 63.4% in January
The Talking Fed
The Federal Reserve gave its semi-annual monetary policy report to Congress today. The Coronavirus was featured as the Fed board warning that the Coronavirus outbreak “presented a new risk” to the economic outlook for the U.S. and warned of disruptions in global markets. The Fed also pointed out that “in recent weeks, equity and bond markets gave up some of their gains as uncertainty about the economic effects of the Coronavirus weighed on investors’ sentiment.”
Services: The January ISM Non-Manufacturing Report (2/3 of our economic output) was stronger than expected with a 55.5 vs. 55.0 estimate.
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).
What’s on the Agenda for this Week?
Experts are expecting a pattern very similar to last week with MBS retreating from the 102.23 “line in the sand” resistance level each time it was tested. Then after some “cap space” has been made, MBS would improve to fill in the at space with the net impact of very good pricing for the week but no real gains over the best pricing levels of last week.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Zombie Plague, (2) The Talking Fed and (3) Domestic Flavor.
(1) Zombie Plague: This is going to continue to drive the markets as bond traders and economists alike are essentially whittling down their 1st quarter GDP estimates for China down to zero. Over 400 million people in China are in lock down mode, with parts of Beijing now joining that group. While some factories are scheduled to reopen, millions upon millions of factory workers will continue to be locked in their residences. The “official” number of deaths now tops 900 which is more than the SARS outbreak. The real number of deaths is probably closer to 10K according to non-state controlled reports. The impact of prolonged global supply chain disruption is a big concern.
(2) The Talking Fed: Fed Chair Jerome Powell will give his semi-annual monetary policy report to the House Financial Services Committee on Tuesday and then the Senate on Wednesday. His written report was already turned in on Friday. The bond market will pay close attention to his live responses to questions posed by the peanut gallery.
(3) Domestic Flavor: The biggest reports of the week will be Thursday’s Consumer Price Index and Friday’s Retail Sales although the markets will largely discount any strength and assume that headwinds from the global slowdown (Coronavirus) will cause lower readings in the near term.
The Talking Fed: S.F. Fed President Mary Daly said, “We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment.” Philly Fed President Patrick Harker said, “My own view right now is that we should hold steady for a while and watch how developments and the data unfold before taking any more action.”
On Deck for Tomorrow: Fed Chair Powell, JOLTS, 3 year note auction.
Across the Pond
China: CPI YOY 0.1% vs. estimates of 0.1%.