What Happened Last Week?
Solid Week Despite Friday’s Selling
Heading into last week, it wasn’t entirely clear what sort of value any of the scheduled events could offer in terms of shaping the broader trends in rates. The first 4 days ended up acting as a correction to the previous week’s runaway sell-off, but a correction that was kicked off by the previous Friday’s “Fed pivot” headlines. Friday ended up being a bit of an afterthought with moderate overnight losses giving way to flat trading in the domestic session. Data was uneventful as traders turned their attention to this week’s bigger-ticket events and then the all-important CPI data next week.
Source: Matthew Graham, Mortgage News Daily 10/28/22)
What’s on the Agenda for this Week?
Overview
Happy Halloween! Will it be a scary session today and this week?
Three Things
The three areas that have the greatest ability to impact mortgage backed securities (MBS) backend pricing this week are: (1) The Talking Fed, (2) Central Bank Palooza and (3) Jobs, Jobs, Jobs.
(1) The Talking Fed: On Wednesday at 2 pm ET will be the Fed’s latest Interest Rate Decision and Policy Statement followed by a live presser with Fed Chair Powell. The bond market widely expects a 75BPS hike; however, speculation has grown that the Fed will signal only a 50BPS hike for the December meeting. The bond market will be looking for language on a possible “twist” on Treasuries (selling shorter term Treasuries and replacing them with longer term Treasuries on their balance sheet) and if there is any more momentum (a “few” FOMC members brought up that they should consider selling MBS from their balance sheet since none are rolling off).
(2) Central Bank Palooza: Australia and England will issue key interest rate decisions. Both are expected to raise rates. The focus of the markets will be the Bank of England that “blinked” in the face of the political turmoil and was forced to start an emergency bond buying program that has since ended. Prior to the political soap opera in Great Britain, the BofE signaled that they would be very aggressive in raising rates and even suggested a rate hike in between meetings. Will the BofE be back on track now or be softer than previously expected?
(3) Jobs, Jobs, Jobs: There is a TON of job and wage related data this week with at least one related report each day, which include the ISM’s Employment Index, JOLTS, ADP Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims. Then it will be Big Jobs Friday.
Domestic Flavor
Inflation Nation: The Fed’s preferred key measure of inflation, Core (ex food and energy) PCE, increased at a 0.5% clip on a MOM basis which matched expectations. YOY it increased from 4.9% to 5.1%. The Headline PCE increased by 0.3% on MOM basis which matches August’s pace but was lighter than expectations of 0.5%. YOY it was up 6.2% which was much higher than expectations of 5.8%.
Incomes and Spending: The Employment Cost Index for the 3rd quarter showed a jump of 1.2% which matched expectations and was on top of the increase of 1.3% in the 2nd quarter. September Personal Incomes rose by 0.4% which was higher than expectations of 0.3%, plus August was revised higher from 0.3% to 0.4%. Personal Spending was higher than expected (0.6% vs. estimates of 0.4%).
Taking it to the House: The September Pending Home Sales Index (an index based upon a small sample size and NOT the summary of all contracts signed but not yet closed) fell by 10.2% vs. estimates of -5.0% on a MOM basis, which is the weakest since 2010. YOY, it declined 31%.
Market Wrap-up
Rosie the Riveter
The October Chicago Purchase Manager’s Index (PMI) was dismal with a contractionary reading of 45.2 which was even lower than September’s pace of 45.7 and well below the market consensus of 47.0.
On Deck for Tomorrow
Reserve Bank of Australia Interest Rate decision, ISM Manufacturing, JOLTS, Construction Spending.