Learn from the Past
Mortgage backed securities (MBS) lost 149 basis points (BPS) from last Friday’s close which caused fixed mortgage rates shoot higher compared to the prior week.
Once again, it was all Coronavirus, all the time, as the global economic slowdown becomes more and more prevalent. This forced a series of government and central bank actions that were designed to stimulate the markets but actually had the opposite effect as the markets signaled it was too little in advance of a major global economic recession that may be coming due to the virus.
• The February Headline Producer Price Index (PPI) YOY increased by 1.3% vs. estimates of 1.8%.
• The Core PPI (ex food and energy) YOY increased by 1.4% vs. estimates of 1.7%.
• (PPI) YOY increased by 1.3% vs. estimates of 1.8%.
• The February Headline Consumer Price Index (CPI) YOY increased by 2.3% vs. estimates of 2.2%.
• The Core CPI (ex food and energy) YOY increased by 2.4% vs. estimates of 2.3% as Services inflation continues to accelerate to its highest since August 2016 and as goods inflation languishes.
President Trump: Officially declared a National Emergency which activates approximately $50 billion in funds available to FEMA and others and allows suspension of laws and regulations to move quickly for approving testing and treatment options.
Central Bank Palooza
The Peoples Bank of China announced a targeted RRR cut of 50bp-100bp for banks qualified in “inclusive finance” tests, effective March 16, which will release liquidity of RMB 400bn. An additional 100bp cut will be granted for qualified joint-stock commercial banks, unleashing liquidity of RMB 150bn to the market. The Bank of Canada announced an emergency 50 BPS rate cut plus a $10B support program. announced an emergency 50 BPS rate cut plus a $10B support program. The European Central Bank (ECB) kept their main interest rate at 0.0% and their deposit rate at -0.5% but announced more liquidity (asset purchases) to their schedule. The Federal Reserve stepped in with emergency measures of $1.5 trillion “across a range of maturities” to include bills, notes, Treasury Inflation-Protected Securities and other instruments. The Bank of England has an emergency -50BPS rate cut, and slashed capital buffer requirements.
What’s on the Agenda for this Week?
Last week saw a large sell-off due to investors just wanting to get something, anything sold so that they can put their hands on cash, as well as reaction to numerous rate cuts by global central banks. This week started off with a big spike in pricing but that is NOT due to the Fed’s rate cut of -100BPS (because that will do NOTHING to stimulate growth). The rally is solely due to the Fed purchasing $200B of MBS (announced) which created demand where otherwise there was none. MBS shot up +160 in early trading and are now bouncing in the +80 to +100 range. Look for MBS to shed more pricing from early levels IF they can get a stimulus package to the floor today.
The three areas that have the greatest ability to impact backend pricing are: (1) Coronavirus, (2) Central Bank Palooza, (3) Bailout Bonanza.
(1) Coronavirus: The following are the most recent headlines that the bond market is focused on:
• 49 states now report cases
• Over 3,800 cases in the U.S.
• California cases jump 14%
• NYC and LA close all schools, all bars, entertainment, gyms closed
• Germany reports 1,000 new cases – closes all borders
• Iran’s “official” numbers spike by over 1,000 new cases overnight
(2) Central Bank Palooza: Our Federal Reserve preempted their Wednesday FOMC meeting with emergency action on Sunday. You can listen to Powell’s Press Conference here. They lowered their key interest rate by -100 BPS to ZIRP (zero interest rate policy). They also announced $700 billion in QE with $200B, of that specifically for MBS purchases.
The Bank of Japan’s Rate Decision has been moved up from Thursday to Monday and the Peoples Bank of China will meet on Friday. New Zealand unexpectedly slashes rates by 75bps to a record low 0.25%; Warns Kiwi QE coming.
(3) Bailout Bonanza: A White House press conference is scheduled for today, and we may get the details of the massive stimulus package that the government has been working on for the past week. The IMF is working on a trillion dollar stimulus package today as well.
Manufacturing: The March NY Empire Manufacturing Index was dismal, contracting -21.5 vs. estimates of +4.
Stimulus? The House has passed their version of the new stimulus package but it is being upgraded in the Senate, no vote is expected today.
The-virus peak is expected over the next eight weeks, declining thereafter.