Learn from the Past
Overview
Mortgage backed securities (MBS) lost 33 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher compared to the prior week.
Rising inflation (CPI up 2.5%, Import Prices up 0.7%), solid Retail Sales and very high Small Business Optimism and Consumer Sentiment, combined with some very strong technical resistance levels, pushed long bond prices lower which pushed up mortgage rates.
Domestic Flavor
Retail Sales: January was basically in line with expectations with the Headline number hitting 0.3% vs. estimates of 0..3%. When you strip out Autos, it was also 0.3% vs. estimates of 0.3%.
Genco Olive Oil: The Import/Export business is good with prices rising. Export Prices MOM climbed by 0.7% vs. estimates of a decrease of -0.1%. Import Prices MOM increased by 0.3% but that was a lower than market forecasts of 2.5%.
Production: Industrial Production for January contracted by -0.3% vs. estimates of -0.2%. Capacity Utilization matched expectations with a reading of 76.8%.
Consumer Sentiment: The preliminary UofM Consumer Sentiment Index was quite strong at 100.9 vs. estimates of 99.5%.
Inflation Nation: The January Consumer Price Index was a little hotter than expected with the Headline CPI YOY at 2.5% vs. estimates of 2.4% and the Core (ex food and energy) YOY at 2.3% vs. estimates of 2.2%.
Small Business Optimism: The January NFIB Small Business Optimism Index was much higher than expected (104.3 vs. estimates of 103.2) and a nice surge over December’s level of 102.7.
The Talking Fed
Fed Chair Jerome Powell had two days of testimony with the Committee on Financial Services in the House and the Senate Banking Committee. The statement was basically the same as what he turned in last Friday so the bond market had no real reaction to the written statement and during his live Q&A, there were no bombshells at all.
What’s on the Agenda for this Week?
Overview
This is a holiday-shortened week that is strife with fear over a global economic slowdown and the China story will be the biggest factor in pricing this week. Experts expect an upside of +9 to +21 BPS to start off the week. Further gains to as much as +40 are possible if there is a “do nothing” China Central Bank outcome on Thursday. However, if they do announce a significant amount of stimulus, then MBS weekly gains are probably capped out in the +12 to +21 range.
Three Things
The three areas that will have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) Central Bank Palooza, and (3) Geopolitical
(1) Coronavirus – COVID-19. This continues to be the number one concern among long bond traders and global economists due to the longer term effects of a massive supply chain disruption and very steep decrease in consumer spending in China as over 700 million citizens are now in areas that are locked down for travel, work, etc. Meanwhile, the number of “official” cases keeps rising as well as the death toll while the real number is certainly many times higher and cause for concern.
(2) Central Bank Palooza: China’s Central Bank will have their big policy meeting on Thursday. They have been active almost daily with lowering smaller term interest rates, putting the brakes on selling in the stock market and instructing banks to not call in delinquent loans. The focus Thursday will be on their key interest rate which has not been part of the recent adjustments and any further financial stimulus. Back at home, we get the Minutes from our last FOMC meeting and a slew of speeches this week.
(3) Geopolitical: While China has been soaking up the headlines, military activities as well as injuries and casualties have been increasing from Iran and their controlled groups upon American facilities.
Market Wrap-up
Domestic Flavor
Manufacturing: The regional NY Empire Manufacturing Index was much stronger than expected in February (12.9 vs. estimates of 5.0).
Taking it to the House: The February NAHB Housing Market Index continues to be in very positive territory with a 74 reading.
On Deck for Tomorrow: FOMC Minutes, Weekly Mortgage Applications, New Housing Starts and Building Permits, PPI.
Across the Pond
Great Britain: Unemployment Rate 3.8% vs. estimates of 3.8%.