Learn from the Past
Mortgage backed securities (MBS) lost 21 basis points from last Friday’s close which caused fixed mortgage rates to move higher compared to the prior week.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were higher than expected, 840K vs. estimates of 820K. The four week moving average moved lower to 857K which is 4 times higher than the pre-Covid era. Continuing Claims dipped below 11M with a reading of 10.976M. The August Job Openings and Labor Turnover Survey (JOLTS) showed unfilled jobs of 6.493M vs. estimates of 6.685M.
Services: The September ISM Non Manufacturing Index (2/3 of our economy) was stronger than expected with a 57.8 vs. estimates of 56.3 reading. New Orders were very robust with at 61.5 vs. 44.7 reading. The Employment Index actually broke above 50.00 for a reading of 51.8 which is expansionary.
Taking it to the House: Weekly Mortgage Applications increased by 4.6%, led by a jump of 8.0% in Refinance Applications. Purchase Applications decreased by 2.0%.
The Talking FedThe Minutes from the last FOMC meeting were issued. You can read the Official Release here. Some key takeaways are:
• The Fed pointed out that their policy guidance (of low rates) is not a guaranty and is always subject to change depending on financial conditions.
• “Many” Fed members were under the impression that there would be another stimulus package by now (there hasn’t been).
• The pace of any economic recovery would be slower than they projected without fiscal stimulus.
What’s on the Agenda for this Week?
This is a holiday-shortened week (Monday closed for Columbus Day).
The three areas that will drive backend pricing this week are: (1) Stimulation Nation, (2) Coronavirus and (3) Domestic Flavor.
(1) Stimulation Nation: There were some severe movements higher and lower last week in MBS intraday pricing as a direct result of tweets, speeches and interviews regarding the next round of stimulus. Any movement towards an agreement will continue to be negative for pricing and continued stalemates will be positive for backend pricing.
(2) Coronavirus: Our nation’s daily cases are up over 12% from last week with a 7 day moving average of 49,542. 32 states are seeing surges/increases in their 7 day averages. This provides significant headwinds to small businesses which are the backbone of our economy. This trajectory will continue to provide support for long bond prices this week.
(3) Domestic Flavor: There will be some inflationary news with CPI and PPI but the main focus of bond traders will be the high-frequency Initial Jobless Claims and Friday’s Retail Sales data. However, the Amazon Prime sales this week will probably provide more of an insight into the U.S. Consumer.
Business Optimism: The September NFIB Business Optimism Index was much stronger than expected, breaking above 100 with a 104.00 vs. 99.6 estimate. The October IBD Economic Optimism Index jumped from 45 in Sep to 55.2 in October.
Inflation Nation: The headline Consumer Price Index YOY increased by just 1.4% which matched expectations. The Core (ex Food and Energy) was 1.7% vs. estimates of 1.8%. Home Prices and Used Auto Prices shot up while Rents tanked.
Stimulation Nation: Senate Majority Leader Mitch McConnell says that the Senate will vote on a $500B Bill to fund more PPP as early as next week.
On Deck for Tomorrow: Weekly Mortgage Applications, Producer Price Index, Speeches by the Fed’s Clarida and Quarles.