Learn from the Past
Mortgage backed securities (MBS) gained 69 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the prior week.
It was another week of very solid and expansionary economic data which is generally negative for mortgage rates. However, this was all overlooked as it was all Coronavirus, all the time, last week as economists and long bond traders are becoming more and more convinced that this will be a longer-term disruption to global supply chains and economic growth, which is positive for mortgage rates.
Inflation Nation: January Headline Personal Consumption Expenditures (PCE) YOY grew at 1.7% which matched expectations and was an increase over December’s pace of 1.5%. Core PCE (ex food and energy) YOY grew at 1.6% which was a tick lower than expectations of 1.7%. Personal Income came in hot, double the market expectations (0.6% vs. estimates of 0.3%). Personal Spending was 0.2% vs. estimates of 0.3%.
Manufacturing: The February Chicago PMI was much stronger than expected (49.0 vs. estimates of 45.9) and a big improvement over January’s very weak reading of 42.9. The January Durable Goods Orders were much better than expected (-0.2% vs. estimates of -1.5%) and the December data was revised upward from 2.4% to 2.9%. Ex Transportation, orders were up +0.9% vs. estimates of only 0.2%.
Consumer Sentiment: The final reading for February’s Consumer Sentiment Index was revised upward to 101.00 vs. estimates of 100.9.
GDP: The second revision to the previously released 4th quarter GDP remained at 2.1%.
The Talking Fed
Fed vice-chair Richard Clarida (number 2 at the Fed) said that the US economy and monetary policy are in a “good place”, noting that it is still too soon to speculate on whether the Coronavirus will lead to a material change in US economic outlook, and assured markets that the Fed is closely monitoring the outbreak. He also said that as long as incoming information remains broadly consistent with Fed’s outlook, the current stance of monetary policy will remain appropriate, although he did admit that disruption from the virus could spill over to the global economy, even if such has not been seen yet.
What’s on the Agenda for this Week?
Another day, another record high for MBS which means a record low for fixed mortgage rates. There is no doubt that the trajectory of news and data regarding the Coronavirus will only steepen which will continue to help backend pricing. The wild card will be IF (and that is a big IF) our Federal Reserve steps in prior to their scheduled FOMC meeting on March 18th and in what measure if they do. Keep in mind that there is actually NOTHING that they can do to help the economy but they can help the stock market. Look for better pricing today and throughout the week.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) Central Bank Palooza and (3) Domestic Flavor.
(1) Coronavirus: The Covid-19 virus is spreading to more and more places and numbers continue to spike. The steady stream of negative news continues to spook the stock market and financial systems worldwide. This story will only continue to get worse and that fear will continue to drive money into long bonds with is good for MBS pricing.
China reported another 42 deaths; however, news out of China is largely ignored as it is viewed as “highly manipulated lower” as they refuse to officially classify tens of thousands of cases that have been confirmed as Covid-19 via one test. But because they don’t follow up with two other tests after that point, they are not considered as passing the threshold for Covid-19 confirmation.
(2) Central Bank Palooza: The Bank of Canada will issue their Interest Rate decision and policy statement this week. The stock markets are clamoring for the Federal Reserve to save their bacon, with the market pricing in at least one if not two emergency rate cuts in the next two weeks are a part of a global Central Bank coordinated effort to keep the financial markets afloat. The Bank of Japan just stepped in and purchased a record 101 billion yen in ETFs to stabilize markets.
(3) Domestic Flavor: There are some very heady economic releases this week with ISM Manufacturing and Services and a ton of Jobs data with ADP, Weekly Claims, Challenger Job Cuts, Non Farm Payrolls, Unemployment Rate, Average Wages.
Manufacturing: The February ISM Manufacturing Index continues to show expansion in the Manufacturing Sector, just breaking above the 50.0 mark with a 50.1 reading vs. estimates of 50.5.
Bob the Builder: New Construction Spending jumped 1.8% in January which blew the door off of estimates for only a 0.7% gain. December was revised upward significantly as well.
On Deck for Tomorrow
Reserve Bank of Australia Interest Rate Decision, Total Vehicle Sales.