Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week. That’s the good news. The bad news? For the month of September, MBS lost 68 BPS which pushed fixed conventional mortgage rates to their highest levels in seven years.
It was a big week for economic data with big-hitting reports like GDP, PCE and Chicago PMI – all showing solid growth. The Federal Reserve raised their key Fed Fund rate and reaffirmed that they will continue to raise rates on a gradual path until they get to a “neutral rate” (the theoretical rate where inflation and interest rates are balanced).
The Talking Fed
You can read the official FOMC statement here.
You can read their economic projections here.
Here is an overview of their statement:
– Raised they key Fed Funds Rate from 2.00% to 2.25%.
– Only meaningful change in FOMC’s statement is removal of the sentence on maintaining “accommodative” policy.
– The overview of the economy is basically the same as their August statement: labor market continues to strengthen, activity “strong.”
– Fed sees 2018 GDP growth at 3.1%, a noticeable upgrade from the 2.8% it saw in June, without any expected breakout in inflation.
– GDP growth of 2.5% in 2019, up from 2.4%, suggesting the base case is that trade disputes and tariffs do not detract from growth much at all.
– The “dot plot” chart was relatively the same as June’s projections:
• 2018 2.375% (range 2.125% to 2.375%); prior 2.375%
• 2019 3.125% (range 2.125% to 3.625%); prior 3.125%
• 2020 3.375% (range 2.125% to 3.875%); prior 3.375%
• 2021 3.375% (range 2.125% to 4.125%)
Domestic Flavor
Inflation Nation: Personal Consumption Expenditures (PCE), the Fed’s key measure of inflation, matched market expectations with the Core PCE YOY remaining at 2.0%. The Headline PCE YOY matched expectations at 2.2% but moved a tad lower from July’s pace of 2.3%. Personal Income remained at July’s 0.3% pace and Personal Spending matched expectations at 0.3% but were just off July’s pace of 0.4%.
Manufacturing: The September Chicago PMI data was very robust even though it was lighter than expectations (60.4 vs. estimates of 62.5). Any reading above 50 is expansionary for this bellwether manufacturing index and a reading above 60 is very strong.
Consumer Sentiment: The final read for the September data set hit 100.1 vs. the preliminary release of 100.8. Any reading above 100 is extremely strong. This is the second highest reading of the year.
GDP: This was the third look at the 2nd quarter GDP and it remained at 4.2%. But the Product Price Index was revised higher and beat out estimates (3.3% vs. estimates of 3.0%).
What’s on the Agenda for this Week?
Overview
September is in the books. The long term trend has been and will be gradually higher rates for 2018…but the key word is gradual. There is some very good support in the new channel that should last until this Friday’s big jobs data dump. But there are several key Fed speeches and economic releases along the way that do have the gravitas to move pricing. While pricing may stabilize in the very short term, it is simply not worth the risk for any near to long term floating.
Three Things
The three areas that the bond market will focus on the most and have the greatest ability to impact backend pricing are: (1) Jobs, Jobs, Jobs, (2) Trade Wars and (3) The Talking Fed.
(1) Jobs, Jobs, Jobs: This week there are no less than 12 different economic releases that address the labor market (jobs, wages, etc.). Friday’s Employment Situation will get the most weight with bond traders giving the YOY Average Hourly Earnings the most attention. The estimates call for a 2.8% to 3.0% range; anything above 2.9% will be negative for mortgage rates.
(2) Trade Wars: NAFTA is NO-FTA…it is no more, but it has been replaced with a last-minute agreement between Mexico, Canada and the U.S. called USMCA. This agreement must still be approved by Congress though. The spotlight continues to be on the China vs. U.S. Trade War.
(3) The Talking Fed: After last week’s Fed meeting, the blackout period of Fed speeches is over and we will hear from a lot of FOMC members this week:
10/01/18 Raphael Bostic, Neel Kashkari and Eric Rosengren
10/02/18 Fed Chair Jerome Powell, Randal Quarles
10/03/18 Charles Evans, Tom Barkin, Patrick Harker, Loretta Mester
Market Wrap-up
Overview
As expected, MBS have been confined to the trading channel. Today’s economic data was a mixed bag but still strong enough to pressure MBS slightly.
Domestic Flavor
Manufacturing: The September ISM Manufacturing report (1/3 of our economy) was very strong with a 59.8 reading vs. market expectations of 60.0. Any reading above 50 is strong, a reading at or near 60 is robust. There was a small reduction of 2 points in backlogs but hiring was up three-tenths to 58.8 which is very hot.
Construction Spending: The August data was lighter than expected (0.1% vs. estimates of 0.4%) but July was revised upward from 0.1% to 0.2%. Single Family Residential Spending fell by 0.7% and multi-unit dropped by 1.7%.
On Deck for Tomorrow
Fed Chair Jerome Powell, Total Vehicle Sales.