Learn from the Past
Overview
Mortgage backed securities (MBS) lost 25 basis points from last Friday’s close which caused fixed mortgage rates to move higher.
After a brief pause in the sell-off of MBS two weeks ago, they resumed their downward trend last week which continued to push fixed mortgage rates upward. The FOMC Minutes gained the most attention of long-bond traders last week and its consistently “hawkish” tone did provide a little more pressure to pricing.
Taking it to the House
September Existing Home Sales were a little lighter than expected (5.15M vs. estimates of 5.30M). But there were some bright spots. The median sales price reached another new high and is now $258,100 which is up 4.2% from this time last year. Total sales are now up 4.1% on a yearly basis. Inventories got a little relief with 4.4 months of supply vs. 4.2 months last year. Weekly Mortgage Applications hit a 17 year low. Mortgage Applications dropped by 7.1% overall, led by a steep drop of 9.0% in Refinance Applications. Purchase Applications dropped by 6.0%. New Housing Starts were lighter than expected (1.201M vs. estimates of 1.237M). Building Permits were also light (1.241M vs. estimates of 1.280M).
The Talking Fed
Former Fed Chair Alan Greenspan said that the 50 year low Unemployment Rate coupled with record number of job openings (JOLTS) will force up wages and inflation. He also said that “This is the tightest market, labor market, I’ve ever seen.”
The Minutes from the last FOMC meeting were issued where they raised their Fed Fund rate by 25 basis points and released their economic projections. Overall, the tone of the Minutes were “hawkish” which really wasn’t a surprise given Fed Chair Powell’s recent comments since the last FOMC meeting. Here are some key highlights from the Minutes:
• A few participants expected that policy would need to become modestly restrictive for a time
• A number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2% inflation objective or the risk posed by significant financial imbalances.
• “Economic activity rose at a strong rate,” household spending and business fixed investment “grew strongly,” and a few participants saw recent data reflecting a stronger economy than they expected.
• “Tightening resource utilization and an increasing ability of firms to raise output prices were cited as factors that could lead to higher-than-expected inflation.”
• “Some participants commented that trade policy developments remained a source of uncertainty for the outlook for domestic growth and inflation.”
• “With regard to upside risks, participants variously noted that high consumer confidence, accommodative financial conditions, or greater- than-expected effects of fiscal stimulus could lead to stronger-than-expected economic outcomes.”
What’s on the Agenda for this Week?
Overview
Unlike last week, this week there are a few events that can actually move MBS out of this very well defined (and tested) trading channel that MBS have been in for the past three weeks. A GDP reading of 3.5% to 3.9% will cause MBS to break below and put MBS in a new and lower channel for worse pricing. The only shot at better pricing is a sub-3% GDP reading AND a very “dovish” European Central Bank…there would need to be both and not just one for MBS to trend towards the top of the channel again. Downside risk is strong.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bank Palooza, (2) GDP and (3) Geo Political
(1) Central Bank Palooza: The Bank of Canada is expected to raise their key interest rate from 1.5% to 1.75% but it will be the European Central Bank (ECB) that will get the most attention of bond traders. The market widely expects the ECB to leave their rates unchanged but experts are looking for more color on how they will reinvest maturing QE proceeds and confirmation of the process of ending their massive QE program in December.
(2) GDP: The first of the 3rd quarter GDP data will be released. The guestimates by economists and traders alike have a huge range of 2.9% to 3.9% with the mean around 3.2%. The higher this number is, the worse it will be for pricing.
(3) Geo Political: There are a lot of balls in the air in this category. There is continued strife with Italy and the EU over their budget, Brexit is still twisting in the wind and the U.S. is not backing off rhetoric of yet another round of tariffs against China. There is also “Davos-in-the-desert,” and the caravan of illegals from Central America has the U.S. cutting off funding for Mexico, et al, which could put the new NOFTA agreement in question.
Treasury Auctions this Week
10/23 2 year note
10/24 5 year note
10/25 7 year note
The Talking Fed
10/23 Neel Kashkari, Raphael Bostic, Robert Kaplan and Charles Evans
10/24 James Bullard, Loretta Mester, Fed’s Beige Book
10/25 Fed’s Balance Sheet
Market Wrap-up
Overview
Yawn…this could be a very volatile week but opened with no economic releases and no real change in any geo-political news that would impact MBS. The result has been a quiet session with MBS just skimming above the support level.
Across the Pond
Japan: All Industry Index 0.5% vs. estimates of -0.2%.
On Deck for Tomorrow
Richmond Fed, 2 year Note Auction.