Learn from the Past
Overview
Mortgage backed securities (MBS) lost 19 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher compared to the previous week.
The long bond market was light on volatility as it was on “pause” ahead of the Federal Reserve meeting on December 19th due to less certainty/consensus over what the Fed will do at that meeting. Overall, our economic data was once again solid but concern over Brexit, France and Trade Wars kept money seeking safe harbor in U.S. based bonds.
Domestic Flavor
Retail Sales: The November data at first glance was just a little stronger than expected, but taking into account the major upper revisions to October, the month-to-month comparison is actually quite good. The Headline monthly gain was 0.2% vs. estimates of 0.1%. But October was revised upward from 0.8% to 1.1%. When you strip out Autos, the MOM gain was 0.2% vs. estimates of 0.2% but October was revised upward from 0.7% to 1.0%. The Control Group really beat estimates with a 0.9% vs. 0.4% expectation.
Inflation Nation: The November Consumer Price Index was exactly as expected with the Core (ex food and energy) YOY number hitting 2.2% vs. estimates of 2.2%, and a slight increase from October’s 2.1% level. The Headline PPI YOY matched expectations with a 2.2% reading which is much lower than October’s 2.5% pace. The Atlanta Fed Business Inflation Expectations rose from 2.2% in November to 2.3% in December.
Jobs, Jobs, Jobs: The Job Openings and Labor Turnover Survey (JOLTS) once again showed over 1 million more jobs waiting to be filled than there are people that are unemployed in the U.S. During the financial crisis, our economy had 2 million job openings (still a lot)…now we have been trending at seven million (more than three times that amount)! This October reading is the second highest on record.
Trade War
China will drop tariffs on Autos for 3 months. Basically they are suspending their new 25% tariff that had increased from 15% to a 40% rate.
What’s on the Agenda for this Week?
Overview
This is a very pivotal week and there could be a lot of volatility Wednesday afternoon. The only way to have better pricing is: IF the Fed does not raise rates AND has 0-1 rate hikes in the “dot plot chart.” IF the Fed raises rates and the dot plot chart shows 2 to 3 rate hikes, MBS will sell off but not by a huge amount.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bank Palooza, (2) Geo-Political and (3) Domestic Flavor.
(1) Central Bank Plaooza: Will there be another rate hike this year and what are the Fed projections for the next couple of years? Those are the major questions that the bond market has. On Wednesday at 2:00pm EST, the Fed will issue their latest Interest Rate decision and policy statement. The market expectations are that the Fed will still raise rates by 1/4 point, but those expectations have pulled back from 90% 30 days ago, down to 60% now. There are several key moments that could cause MBS to trade in very different directions. First is the rate hike itself (if it happens) along with their guidance. But then right afterwards, their “dot plot” chart will give their expectations for future rate hikes. The market expects that the number of rate hikes in 2019 will be reduced but will it show 1, 2 or 3? Next up will be the live press conference with Fed Chair Powell, and his answers to live questions could also cause some volatility. But our Fed is not the only game in town this week as there will also be important Rate and Policy announcements by the Bank of Japan and the Bank of England.
(2) Geo Political: The big 4 are still sucking up all of the oxygen in the room as the market continues to hedge towards safety in regards to Brexit, France and Italy (and the impact on the ability for the Eurozone to remain intact). And rounding it all out are the two most massive economic (and military) forces on earth – U.S. and China – and Trade War negotiations. Meanwhile, China will hold its 3-day economic policy-setting meeting where Chinese policymakers will have the occasion to reaffirm their commitment to reform and their measured easing approach while potentially unveiling more fiscal stimulus.
(3) Domestic Flavor: There will be a lot of housing news this week but none of that will impact pricing. These include he 3rd release of the 3rd quarter GDP, but that is tired and old data at this point. The market will focus on Friday’s fresh print of PCE as the Fed’s main gauge of inflation.
Market Wrap-up
Overview
MBS have basically treaded water all day as there have been no major economic releases with the gravitas to move pricing today.
Domestic Flavor
Taking it to the House: The December NAHB Housing Market Index dropped to 56 vs. estimates of 61. Any reading above 50 is positive but this is a much weaker reading than recent norms and is at the lowest level in almost 3 years.
Treasury: Flight to safety, you bet. The Total Net TIC Flows jumped to +$42.B of foreign money flowing into our Treasury Notes in October, compared to September when the net change was $29B flowing OUT of our Treasuries.
Government Showdown: Looks like everything is poised for a Government shutdown on December 21st.
On Deck for Tomorrow: The FOMC begins two days of meetings, Housing Starts and Building Permits.
Across the Pond
Eurozone: CPI YOY 1.9% vs. estimates of 2.0%.
China: Begins three days of meetings over its economic policy.
Brexit: PM May has called for a vote on her proposal on January 14th. Meanwhile, a second “no contest” vote is being called for by Parliament.