Learn from the Past
Overview
Mortgage backed securities (MBS) lost 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
It was a week filled with Fed speak as we heard from Fed Chair Powell and several Governors and district Presidents as well as the minutes from their last meeting. Overall, the tone was that they all still expected solid economic growth but are likely to pause for now as they wait to see how some geopolitical uncertainties unfold.
Domestic Flavor
Inflation Nation: The December Consumer Price Index was bang-inline with market expectations, with the Core (ex food and energy) YOY CPI remaining at 2.2%. The headline CPI YOY matched expectations of 1.9% which is a decline from November’s pace of 2.2% but that decline was due to oil/fuel prices.
Small Business Optimism: The December NFIB Small Business Optimism Index remains very high, coming in at 104.4 which is very close to November’s reading of 104.8. Plans to increase employment rose 1 point to a net 23%, while a record 39% of small business owners reported job openings they could not fill in the current period, up 5 points from November.
Jobs: The November Job Openings and Labor Turnover Survey (JOLTS) showed that there were 6.888M unfilled jobs. The market was expecting 7.063M. October was revised upward from 7.079M to 7.131M. Once again, the trend continues of having more open positions vs. those looking for work.
The Talking Fed
The Minutes from the last FOMC meeting were issued. There really were not any surprises as we have heard from Powell and other Fed members several times since its release. There were a few that argued for leaving rates alone at the December meeting but obviously they were not voting members. Discussion centered on global concern and recognition that our own economy was solid but could face some headwinds from global and national geopolitical events as well as prolonged trade war. They expressed that their rate was close to if not at neutral and that they were solidly in the “data dependent” camp now.
What’s on the Agenda for this Week?
Overview
Last week saw very little movement with MBS on a weekly scale. This week could prove to be more volatile depending on how the Brexit vote unravels. There is some important economic data this week (Retail Sales, PPI and the Fed’s Beige Book) but those will be largely overlooked as the whirlwind of geopolitical uncertainty will get the lion’s share of attention from long bond traders. The intra-day highs of January 3rd are mostly likely the best pricing that we will see for all of 2019. Look for MBS to shy away from those levels unless there is a complete implosion on Brexit, and then MBS will make a run at it but won’t stay there for long. There are no economic releases today that will impact pricing.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Brexit, (2) Government Partial Shutdown and (3) China.
(1) Brexit: Tuesday will see an important vote. Experts are speculating that the current plan submitted by PM May will be defeated and may even lead to another “no confidence” vote which could see her out as the Prime Minister. If the current plan is defeated, there may be a “plan B” submitted which contains changes that the EU most likely will not agree to which puts the odds of a “hard” Brexit very high.
(2) Government Partial Shutdown: The first official round of no pay checks just hit with a second round approaching fast. This could mean a reduction in the range of $2B in consumer spending each month that this drags on and will start to weigh on economic growth. There will still be economic growth but it will be at a reduced level than it would have been.
(3) China Trade: After several days of face-to-face negotiations last week which were touted by both sides as positive, the market will be looking for further movement towards an agreement.
Market Wrap-up
Overview
It was a very light trading session with MBS moving flat and sideways as there were no domestic economic releases to guide pricing. Concern over no progress on the Government Partial Shutdown talks, weak Chinese trade data and Tuesday’s Brexit vote kept MBS at very lofty levels but could not push pricing higher.
Domestic Flavor
The Talking Fed: Former Fed Chair Janet Yellen said it is “very possible” that the Fed has made its last rate hike of this cycle but only if the downturn in global economy spills over to the U.S. Yellen added that she expects the Fed to “take a breather [to] evaluate where the economy is” before it moves again. But she covered all the bases when she said that “perhaps another rate hike or two is perfectly possible, but nothing is baked in.”
Across the Pond
China: Exports fell by 4.4% vs. an expected gain of 3.0% and Imports tanked by -7.6% vs. estimates of +5.0%.
On Deck for Tomorrow
Japanese GDP, ECB President Mario Draghi speech, PPI, and Empire Manufacturing.