Learn from the Past
Overview
Mortgage backed securities (MBS) gained 50 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the previous week.
Mortgage rates dropped to their lowest levels due to three main factors: Weak manufacturing data out of Asia and Europe, a very “dovish” Federal Reserve on Wednesday, and the continued train wreck that is Brexit. The weak economic data and geo-political instability had money flowing into the safe-haven of our U.S. bons
The Talking Fed
As expected, they kept their key interest rate unchanged. However, they certainly had a more “dovish” tilt to their outlook compared to their last projections in December.
They had three key releases last week:
Read the Official Fed Policy Statement.
Read their Economic Projections here.
Read their Balance Sheet Normalization plans here.
Here are some key points:
• Fed leaves rates unchanged, says economic growth has slowed form Q4, even as labor market still strong, job gains solid.
• As expected, the Fed will taper its balance-sheet roll off, sees it ending by the of September.
• Fed signals no rate hike this year with one increase in 2020.
• 11 officials for zero 2019 hikes, four for one hike.
• Federal Open Market Committee still sees a sustained economic expansion, strong labor market conditions, and inflation near 2% objective as the most likely outcomes; will be “patient” in determining what rate moves may be appropriate, given global economic and financial developments and “muted” inflation pressures.
• Says overall inflation on a 12-month basis has declined, largely due to lower energy prices, while core gauge remains close to 2 percent; now says market-based measures of inflation compensation have remained low in recent months; continues to see survey-based measures of longer-term inflation expectations as little changed.
• The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities (MBS) to decline, consistent with the aim of holding primarily Treasury securities in the longer run.
o Beginning in October 2019, principal payments received from agency debt and agency MBS will be reinvested in Treasury securities subject to a maximum amount of $20 billion per month; any principal payments in excess of that maximum will continue to be reinvested in agency MBS.
o Principal payments from agency debt and agency MBS below the $20 billion maximum will initially be invested in Treasury securities across a range of maturities to roughly match the maturity composition of Treasury securities outstanding; the Committee will revisit this reinvestment plan in connection with its deliberations regarding the longer-run composition of the SOMA portfolio.
o It continues to be the Committee’s view that limited sales of agency MBS might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public well in advance.
Taking it to the House: A blockbuster Existing Home Sales Report for February with one of the largest monthly gains on record. 5.510M annualized units beat out estimates of 5.10M and represents a 11.2% MOM gain. The March NAHB Housing Market Index remained at 62, the market was expecting 63. Any reading above 50 is positive and above 60 is very strong.
What’s on the Agenda for this Week?
Overview
Look for rates better than have been seen over the past month, but making further pricing gains over and above Friday’s intra-day highs is going to be very tough to realize.
Three Things
The three things that have the greatest ability to impact backend pricing this week are: (1) Geo Political, (2) Trade Snore and (3) Inflation Nation.
(1) Geopolitical: Brexit continues to take center stage as Prime Minister Theresa May’s cabinet is in full revolt. In a last-ditch effort to get the very unpopular deal pushed through before the deadline, May is offering to resign IF they pass her deal. This deal could be extended to May 22nd or April 12th depending on how some votes go. The markets are also concerned about military escalation in Israel.
(2) Trade Snore: Trade Representative Lighthizer and Treasury Secretary Mnuchin are visiting China this week. With the Mueller investigation over, it is believed that trade talks may take a step forward now that China has confidence in leadership in the U.S.
(3) Inflation Nation: The Fed’s key inflation measure will be issued on Friday with the PCE report. The markets are expecting the Core YOY number to remain below 2.0%.
Treasury Auctions This Week
03/26 2 year note
03/27 5 year note
03/28 7 year note
The Talking Fed This Week
03/25 Charles Evans, Patrick Harker
03/26 Patrick Harker, Eric Rosengren
03/27 Esther George
03/28 Raphael Bostic, John Williams, James Bullard
03/29 John Williams
Market Wrap-up
Overview
A mild open to a week that is back-loaded with heady economic data. There were no major economic releases today. Once again MBS tested the top of the trading channel and it held up nicely.
Domestic Flavor
Manufacturing: The Dallas Fed Manufacturing Business Index was stronger than expected (8.3 vs. estimates of 7.0).
On Deck for Tomorrow: Housing Starts and Building Permits, Case Shiller, FHFA Home Price Index, Consumer Confidence, and Richmond Fed Manufacturing.
The Talking Fed
Chicago Fed President Charles Evans said that “if growth runs close to its potential and inflation builds momentum, then some further rate increases may be appropriate over time to ensure that the economy settles in on its long-run sustainable growth path and that inflation runs symmetrically about our 2 percent target,” and “in contrast, if activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold – or perhaps even loosened – to provide the appropriate accommodation to obtain our objectives.”
Philly Fed President Patrick Harker said that U.S. rates were still one to two hikes away from their ‘neutral’ level but that there was no rush to move them again for the time being. “I think we stand pat now and wait to see how the data comes.”
Across the Pond
Japan: All Industry Index -0.2% vs. est. of +0.2%.
Germany: Business Climate 99.6 vs. estimates of 98.5.