Learn from the Past
Overview
Mortgage backed securities (MBS) lost 28 basis points from last Friday’s close which caused fixed mortgage rates to move slightly higher compared to the prior week.
Domestic Flavor
Retail Sales: The August Advanced (will be revised) were lighter than expected, plus July was revised much lower. The headline Retail Sales MOM increased by 0.6% vs. estimates of 1.0%. July was revised from 1.2% down to 0.9%. Retail Sales Ex Autos MOM increased by 0.7% vs. estimates of 0.9%. July was revised downward from 1.9% to 1.3%.
Taking it to the House: Weekly Mortgage Applications dropped by 2.5%. Refinances tanked by 4.0% and Purchases moved lower by just 1.0%. The September NAHB Housing Market Index hit a new record high of 83 and beat out expectations of 78. August Housing Starts were 1.416M vs. estimates of 1.478M. The good news for the housing industry is that there was a 4.1% rise in SFR starts which IS the housing market. Rental/Multi Family Units dropped by 25.4%. Building Permits hit 1.47M vs. estimates of 1.52M.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were 860K vs. estimates of 850K. The more closely watched 4 week moving average dropped from 973K down to 912K. Continuing Claims were 12.628M vs. estimates of 13.00M.
The Talking Fed
The FOMC kept their key interest rate “range” from 0-0.25% which is unchanged from their prior level. They also released their Economic Projections. The following are some highlights from their Policy Statement, Economic Projections and commentary from Chair Powell:
• They issued their latest QE guidance for $80B in Treasury Purchases and $40B in MBS Purchases.
• The vote was 8-2 with Kaplan and Kashkari dissenting.
• Dot plot: 13 out of 17 Fed Officials forecast no change in their rate through 2023.
• GDP forecasts are updated: 2021 downgraded from 5.0% to 4.0%. 2022 downgraded from 3.5% to 3.0% and 2023 is 2.5% (not previously part of the dot plot).
• Stresses again their longer term objective of a 2% inflation goal. Which means allowing inflation to run above 2% for some time until the moving average is 2%. This could take some time as inflation (core PCE) has been stubbornly below 2% for a very long time.
• Fed Chair Powell says that more fiscal support “is likely needed” (fiscal support comes from Congress, not the Fed).
• The path of the economy is unknown and is tied to the Covid health crisis.
• Powell says test for raising rates is priority (1) Maximum Employment, and (2) Inflation “average” 2%. This means that even if inflation is trending above 2% for a blended average of 2%, but we are not at maximum employment, then rates will still not change.
What’s on the Agenda for this Week?
Overview
This is a very big week in terms of Fed speak, geopolitical issues, economics and more. Last week, the trend moved from testing upper resistance each trading session to flipping to testing the bottom floor of support. This week starts with the same trend of downward pressure.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) the Talking Fed and (3) Domestic Flavor.
(1) Coronavirus: Concerns over the prolonged economic impact of the Covid pandemic has risen recently as the news and data continue to get worse globally. Former FDA Director Dr. Scott Gottlieb said, “I think we have at least one more cycle with this virus heading into the fall and winter.”
(2) The Talking Fed: Fed Chair Powell will speak several times this week along with many other Fed representatives and our Treasury Secretary (who is not part of the Fed but we will lump him into this same category). Here is this week’s schedule:
09/21: John Williams, Robert Kaplan
09/22: Jerome Powell
09/23: Jerome Powell, Loretta Mester, Eric Rosengren, Randall Quarles, Mary Daly
09/24: Jerome Powell, Steven Mnuchin, James Bullard, Charles Evans
(3) Domestic Flavor: There is a lot of housing data this week with Existing Home Sales and New Home Sales along with some other lower level reports but it’s Thursday’s Initial Weekly Claims and Friday’s Durable Goods Orders which will get the most attention from bond traders.
Market Wrap-up
Domestic Flavor
There were no major economic events.
On Deck for Tomorrow
Fed Chair Powell, Existing Home Sales, Richmond Fed Manufacturing Index, 2 year Treasury note auction.