What Happened Last Week
Why Did Friday’s Fed Comments Hurt MBS?
The bond market shifted into a predictable gear for the Friday of the last full trading week of the year (this Friday closes early for Christmas). That is to say it was fairly uneventful. Mortgage backed securities (MBS) underperformed vs the 10-year in the afternoon, and market movers punched above their weight. The most notable example followed comments from the Fed’s Waller which laid bare the committee’s rationale for accelerating the taper this week. This managed to surprise the front end of the yield curve to a small extent which only added to MBS underperformance vs longer-term yields.
Source: Matthew Graham,
Mortgage News Daily 12/17/21)
What’s on the Agenda for this Week?
Overview
Ho, Ho, Ho! We are in the home stretch for Christmas. The bond market will close early on Thursday and will remain closed until Monday. But during this abbreviated week there is a lot of big name economic releases and continued concern over Covid.
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Covid, (2) Inflation Nation and (3) Domestic Flavor.
(1) Covid: Last week, the CDC and the White House said to expect a surge of 600K to 1.3M new cases due to the quick spread of the Omicron variant. This helped to reverse bond sell-off caused by the Fed. Rising numbers domestically and globally will be a factor in hedging against lockdowns, restrictions, and scaled-back demand by consumers (services).
(2) Inflation Nation: The Fed’s key measure of inflation, Core (ex food and energy) PCE will be issued on Thursday, which is projected to be more than double the Fed’s target rate. The headline PCE rate is expected to top 5.5%.
(3) Domestic Flavor: There are a lot of big economic releases crammed into a holiday-shortened week. Consumer Confidence, GDP, Durable Goods Orders, Initial Weekly Jobless Claims, Personal Income and Spending will get a lot of attention from bond traders.
Treasury Dump
There will be a 20-year Treasury bond auction on Tuesday.
Market Wrap-up
Domestic Flavor
Leading Indicators: The November Leading Economic Indicators rose to 1.1% vs. estimates of 0.8%. October’s pace was 0.9%.
On Deck for Tomorrow: 20-year Treasury Bond Auction.
Central Bank Palooza
The People’s Bank of China lowered their benchmark lending rate for the first time in almost 2 years from 3.85% to 3.80% in a rare move to stave off an economic slowdown due to Covid.