What Happened Last Week?
Range Breakout or New Trend Channel?It was an interesting trading session in the bond market on Friday as Treasury yields closed at their weakest levels at the same time that mortgaged backed securities (MBS) were at their strongest levels. This uncommon scenario was made possible by a combination of previous MBS underperformance and anxiety over next week’s Treasury auction cycle. In the bigger picture, the moderate weakness in Treasuries serves to confirm the unfriendly range breakout. But this weakness could also be viewed in the context of a new trend channel.
The three areas that have the greatest ability to impact mortgaged backed securities (MBS) backend pricing this week are: (1) The Talking Fed, (2) Domestic Flavor and (3) Geopolitical.
(1) The Talking Fed: The President of the Boston Federal Reserve, Eric Rosengren, is stepping down as of Thursday. He was scheduled to retire in 7 months anyway but is moving that forward for health reasons. But that is just the start of this week’s Fed deluge. Fed Chair Powell will speak twice this week. Experts will be paying very close attention to comments on the economy and any further details or speculation on when the first reduction in MBS purchases will be.
09/27: Charles Evans and John Williams
09/28: Jerome Powell, Michelle Bowman, Charles Evans, James Bullard and Raphael Bostic
09/29: Jerome Powell, John Williams
09/30: John Williams, Patrick Harper and James Bullard
10/01: Patrick Harper
(2) Domestic Flavor: This is a very busy week for economic data. The bond market will focus on manufacturing and inflation. On the Manufacturing front, will be Durable Goods Orders, Richmond Fed, Chicago PMI and ISM Manufacturing. On the Inflation front, on Friday will be PCE, the Fed’s key measure of inflation.
(3) Geopolitical: Germany is trying to form a new government as Merkel’s party has lost some ground with this weekend’s election. Domestically, there is a looming government shutdown on Friday morning with several “kick the can” proposals making their way through the Senate. There is also the original $550B (almost $1T when applying previously approved but unused funds) Infrastructure bill that actually passed in the Senate…this bill will EXPIRE on Friday and will need to be passed in the House. The House has vowed NOT to pass it UNLESS everyone agrees to their monster $3.5T plan at the same time. Plenty of drama to go around.
There will be one last round of dumping of debt into the marketplace before the debt ceiling kicks in. Here is this week’s schedule:
09/27: 2-year and 5-year note auctions
09/28: 7-year note auction
Manufacturing: August headline Durable Goods Orders were much stronger than expected (1.8% vs. estimates of 0.7%). Ex-Transportation, they were lighter than expected (0.2% vs. estimates of 0.5%). Ex-Defense, it was very strong at 2.4% vs. estimates of -0.3%.
Treasury Dump: There was a very weak 2-year Treasury note auction and an okay 5-year auction today.
On Deck for Tomorrow: Fed Chair Powell, Consumer Confidence, Richmond Fed Manufacturing, Case-Shiller Home Price Index, FHFA Home Price Index, 7-year Treasury note auction.