What Happened Last Week?
Ho Hum NFP Friday; MBS Outperform; 50 is The New 75
After being steadily crushed to the most inverted levels in 20 years, the yield curve was ready for a bounce on Friday (i.e., shorter maturities were ready to outperform longer maturities). This pattern often coincides with mortgage backed securities (MBS) outperformance and Friday was no exception. The short end got a push from several Fed speakers who mentioned that 50bp hikes would still be historically fast and that traders could “pivot” their anxiety to focus on the eventual ceiling as opposed to how quickly we get there. Meanwhile 10-year yields moved moderately higher, which is a decent enough result given the 260k vs 200k NFP beat.
Source: Matthew Graham, Mortgage News Daily 11/4/22)
What’s on the Agenda for this Week?
Overview
This is a holiday-shortened week with Friday being closed in observance of Veteran’s Day (thank you, veterans!!). The bond market is not likely to have a major reaction on Wednesday from the mid-term elections unless there are some major surprises.
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Inflation Nation, (2) The Talking Fed and (3) Treasury Dump.
(1) Inflation Nation: Consumer Prices will be the main focus this week with Wednesday’s release of the October CPI report. There would need to be a pull-back in this inflationary indicator for pricing to see a meaningful improvement. Unfortunately, the market expects the MOM headline CPI to increase by another 0.7% and core (ex food and energy) another 0.5%.
(2) The Talking Fed: Fed Chair Powell made it crystal clear to the market last week that they were not interpreting the very plain Fed speak on face value and that Powell would not be moved by markets and “pause” or “pivot” until inflation hits 2%. Is the rest of the Fed on board with that? Now that the Fed’s media blackout period is over, a bevy of Talking Feds will speak and the bond market will react accordingly.
- 11/07: Mester, Collins and Barkin
- 11/08: Williams
- 11/09: Barkin
- 11/10: Waller, Harker, Logan and George
(3) Treasury Dump: MBS pricing will be the most reactive to Thursday’s 30-year Treasury bond auction.
- 11/08: 3-year note
- 11/09: 10-year note
- 11/10: 30-year bond
Market Wrap-up
Domestic Flavor
Consumer Credit: The headline September reading rose by $24.98B, which was a smidge lower than expectations, for an increase of $30.0B. In a major sign that points towards a slowing economy, Revolving Credit Card Debt rose by just $8.323B which is the smallest increase in 4 months.
On Deck for Tomorrow: 3-year Treasury Note Auction, NFIB Small Business Optimism Index.