Weekly Mortgage Overview: 2/24/2020

By February 25, 2020Mortgage Overview

Learn from the Past

Overview

Mortgage backed securities (MBS) gained 33 basis points (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 as economists and long bond traders are concerned that (1) this it is not and will not be contained in China and (2) it will disrupt manufacturing in that region for many, many months. This weakened view of global growth is positive for bonds which perform well in low growth environments.

Coronavirus

While numbers continue to grow in China (and are widely believed to be understated), spikes in cases in South Korea, Japan, Italy and Iran as well as other areas have the market concerned that simply locking down the public in a draconian fashion in China is not sufficient to contain this outbreak. The economic headwinds could significantly impact not only China’s output but the world’s number 3 economy (Japan) as well as other regional manufacturing centers that would serve as a severe supply chain disruption to the United States.

Domestic Flavor

Inflation Nation: January Producer Price Index (PPI), YOY hit 2.1% vs. estimates of 1.6%, Core PPI 1.7% vs. estimates of 1.3%.

Manufacturing: The February Philly Fed Manufacturing Survey shot up to one of the highest readings in 10 years with a 36.7 reading vs. estimates of 12.0. The regional NY Empire Manufacturing Index was much stronger than expected in February (12.9 vs. estimates of 5.0).

The Talking Fed

The Minutes from the last FOMC meeting will be issued on Wednesday. You can read their official release here.

Here are some key takeaways from the Minutes:

• Federal Reserve officials viewed their current monetary policy as appropriate “for a time” while they remained on guard against domestic and global risks that could slow the longest U.S. expansion on record.

• Economic growth expected to continue at a “moderate pace.”

• Easing of trade tensions, receding Brexit risks and stabilizing global growth as reducing downside risks but also generally expected trade uncertainty to remain somewhat elevated.

• Participants agree Coronavirus warrants close watching.

• Participants expect payroll employment to expand at a healthy pace this year; consumption spending would likely remain on a firm footing.

• Once reserves reach ample levels, regular open market operations would be required over time to accommodate trend growth in Fed’s liabilities and maintain ample reserves.

• Committee should resume before long its discussion of the role that repo operations might play in an ample-reserves regime, including the possible creation of a standing repo facility.

• Expressed concern that introducing a symmetric inflation range could be misperceived.

What’s on the Agenda for this Week?

Overview

Acceptance by the economic establishment that the Covid-19 story will only worsen and global economies will slow as a result, and be depressed longer than “just a month,” which is going to be a boon for MBS backend pricing. But all it will take is China taking a few cities out of lockdown and pricing will reverse fast. For the first time ever, there is a real shot at closing above that very stubborn resistance level located at the 102.23 mark but experts are still very cautious that any pricing above that level is sustainable.

Three Things

The three areas that have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) Coronavirus and (3) Domestic Flavor.

(1) and (2) Coronavirus: Covid-19 continues to get a lot of attention from the bond market and will be the dominant force in pricing for several months as infection rates and areas continue to increase and each day another round of factories (most recently Samsung’s smart phone plant) are shuttered due to the virus. Cases in Italy have shot through the roof as they have gone from 1 case 2 weeks ago to now well over 200 cases and 7 deaths as Europe tries to stop the tidal wave from spreading to every country. Same story in Iran that went from zero cases 10 days ago to now more than 50 deaths. While the WHO attempts to continue its “damage control” and placate the markets, the global infection rate is not contained.

(3) Domestic Flavor: There are some big economic releases this week. The revised 4th quarter GDP (third time we have seen that data point) will get attention as well as Consumer Confidence and Consumer Sentiment. But it will be Friday’s PCE (the Fed’s key measure of inflation) report that will get the most weight by bond traders. Core PCE YOY is expected to rise; just how much will have a big impact on pricing.

The Fed

Here is this week’s Treasury auction schedule:

02/25 – 2 year note
02/26 – 5 year note
02/27 – 7 year note

Here is this week’s speaking schedule:

02/24 – Loretta Mester
02/25 – Robert Kaplan, Richard Clarida
02/26 – Neel Kashkari
02/27 – Charles Evans
02/28 – James Bullard

Market Wrap-up

Domestic Flavor

There were no major domestic economic events.

On Deck for Tomorrow

S&P Case-Shiller Home Price Index, FHFA House Price Index, Richmond Fed Manufacturing, Consumer Confidence, and our 2 year Treasury note auction.