What Happened Last Week?
Surprisingly Resilient Despite Stronger NFP
Nonfarm Payrolls (NFP),-the headline component of the big jobs report, came in higher than expected on Friday. Adding to the challenges for the bond market, the unemployment rate ticked down to 3.7% from 3.9% previously (also the forecast for Friday). Given the stakes, experts wouldn’t have been surprised to see a sharper spike in rates Friday. Treasuries know… They spiked 8bps–not huge, but in the range of likely reactions based on the data. So what’s up with MBS only losing an eighth of a point? It’s not a duration issue (after all, 5-year Treasuries had a worse day than 10s). One of the only ways to reconcile the outperformance is to consider apprehension ahead of this week’s Treasury auction cycle. Everything else that merits apprehension (like CPI and Fed Day) would apply to MBS as well as Treasuries.
Source: Matthew Graham, Mortgage News Daily 12/8/2023)
What’s on the Agenda for this Week?
Overview
This is a very pivotal week for longer-term pricing trends.
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) The Talking Fed, (2) Central Bank Palooza and (3) Inflation Nation.
(1) The Talking Fed: The much anticipated FOMC meeting is this Wednesday. Currently, the markets are not pricing in any interest rate change nor a change in policy. The significance of this meeting is the release of their Economic Projections which is used to create the famous “dot plot” chart. While the Fed has been steadfast in communicating that they would remain at their current rate through 2024, the bond market is pricing in a series of rate cuts in 2024 and will be paying close attention to the Fed’s dot plot chart to see if the FOMC starts to show lower rates in 2024.
(2) Central Bank Palooza: Key interest rate decisions will be issued this week from the European Central Bank, Band of England and the Swiss National Bank.
(3) Inflation Nation: There will be key inflationary readings this week with CPI and PPI. CPI is expected to be mild while PPI is expected to show deflation.
Treasury Dump
There are some very important auctions this week.
- 12/11: 3-year and 10-year notes.
- 12/12: 30-year bond.