What Happened Last Week?
Another Day, Another Sell-Off
Bonds may not have sold off in an overly excessive manner on Friday, but they sold off nonetheless. In other words, rates went higher. The early culprits were twofold: a surprisingly hot Producer Price Index and some comments from Fed’s Mester on the prospect of a 50bp rate hike. Then in the afternoon, Fed’s Bullard said similar stuff and went a step further, saying he wouldn’t rule anything out for the next meeting. All this after Fed members spent the past 3 weeks sounding unified on “25bps is all we need.” The sudden shift in tone spooked bonds a bit, but it’s still up to data to drive the decision. Fed Funds Futures suggest we haven’t yet seen enough data to price in a 50bp hike. The result is intraday volatility that gives way to moderate additional weakness.
Source: Matthew Graham, Mortgage News Daily 2/16/23)
What’s on the Agenda for this Week?
Three Things
The three areas that can have the most impact on mortgage backed securities backend pricing this week are: (1) Inflation Nation, (2) The Talking Fed and (3) Central Bank Palooza.
(1) Inflation Nation: The Fed’s preferred key measure of inflation, PCE, will hit this Friday. The headline number is expected increase by 0.5% (5 times higher than the previous month) and Core (ex food and energy) is expected to rise by 0.4%. The bond market will give a lot of weight to this release.
(2) The Talking Fed: The Minutes from the last FOMC meeting will be issued on Wednesday. There is a lot of interest in this release as two Fed presidents have said that they favored a larger increase. There is also interest in if there was any significant discussion over a “pause”. Williams, Bostic and Mester will also speak.
(3) Central Bank Palooza: The Reserve Bank of New Zealand is expected to hike another 50BPS and there will be key speeches from European Central Bank President LaGarde, the Bank of England and more. The bond market is focused on the overall tone of ECB’s hike further and for longer than anticipated/priced in a month ago.
Treasury Dump:
- 02/21: 2-year note
- 02/22: 5-year note
- 02/23: 7-year note
Market Wrap-up
Domestic Flavor
Taking it to the House: January Existing Home Sales were 4.00M vs. estimates of 4.10M, which is down -0.7% from December and 37% YOY. The median home sales price did move higher on a YOY basis and Inventories were up 2.1% on a MOM basis and up 15.3% on a YOY basis and properties averaged 33 vs. 26 days on the market in December and 19 days a year ago.
Rosie the Riveter: The S&P Markit Manufacturing PMI was stronger than expected, 47.8 vs. estimates of 47.3, and the Services PMI actually cracked above 50, 50.5 vs. estimates of 47.2. The Composite was 50.2 vs. estimates of 47.5.
Treasury Dump
Three days kicked off of dumping debt into the marketplace with the shorter 2-year note auction. $42B went off at a high yield of 4.673% (highest/worst since 2007) and a bid-to-cover ratio of 2.61.
On Deck for Tomorrow
New Zealand Interest Rate Decision, 5-year Treasury Note auction, Minutes from the last FOMC meeting.