Learn from the Past
Overview
Mortgage backed securities (MBS) lost -2 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to remain at or near the same levels as the prior week.
There was some very positive economic news with strong readings in the Labor sector, Services sector, and in Consumer Sentiment. All would normally combine for higher mortgage rates but concern and uncertainty over the trade war with China and the Brexit vote kept mortgage rates steady.
Domestic Flavor
Jobs, Jobs, Jobs: The Bureau of Labor and Statistics released their Employment Situation for November and it was a big-time beat. You can read the official release here.
Here is the Tale of the Tape:
Jobs:
November Non Farm Payrolls 266K vs. est. of 180K.
October NFP revised upward from 128K to 156K.
September NFP revised upward from 180K to 193K.
The rolling three month average is now a robust 205K.
Wages:
Average Hourly Earnings rose by 7 cents to $28.29.
Average Hourly Earnings increased by 3.1% on a YOY basis vs. estimates of 3.0%. Last month was revised upward from 3.0% to 3.2%
Employment:
The Headline Unemployment Rate dropped to 3.5% vs. est. of 3.6%.
The U6 Unemployment Rate dropped from 7.00% down to 6.90%.
The Participation Rate dropped from 63.3% to 63.2%.
Consumer Sentiment: The Preliminary December release was much stronger than expected (99.2 vs. estimates of 96.5).
Services: The November ISM Non Manufacturing (Services), which account for more than 2/3 of our economic engine, continued to show expansion with a reading of 53.9. But that was a little below market expectations of 54.7.
Manufacturing: The November Markit Manufacturing Index was stronger than expected (52.6 vs. estimates of 52.2) and remained in expansionary territory but the ISM Manufacturing Index came in below 50 which is contractionary (48.1 vs. estimates of 49.2).
Central Bank Palooza
The Bank of Canada kept their key interest rate at 1.75%
What’s on the Agenda for this Week?
Overview
Just like last week, we expect the Danger Zone to hold and to be avoided. That may change by Thursday or Friday but not due to our Fed. That could only come from a Trade agreement/announcement one way or another and the outcome of the Brexit vote. If there is a postponement of the Sunday round of tariffs due to a real trade deal AND the Brexiteers win on Thursday, MBS could be pummeled. But if the tariffs are postponed based upon good faith “progress”, then MBS will do nothing for the week. If Trade Talk breaks down and tariffs will kick and Jeremy Corbyn is the new PM of the UK, then MBS will rally.
Three Things
The three areas that have the greatest ability to impact your pricing this week are: (1) Trade Wars, (2) Central Bank Palooza and (3)Brexit.
(1) Trade Wars: December 15th is fast approaching and the markets will be very sensitive to any deal or no deal by Sunday’s deadline. This issue is “highjacking” the markets and will be the primary force in pricing this week.
(2) Central Bank Palooza: Our own Federal Reserve Interest Rate Decision and Policy Statement is this week. The Fed has widely telegraphed that they are going to stand pat at this meeting but there are two main areas of focus: their Economic Projections and explanation on their oversubscribed repo auctions which have become a “thing” over the past 2 months. This is one of the FOMC meetings where they release their “dot plot chart” and traders will be looking closely at that to determine the future path of Fed rates. But our Fed is not the only game in town this week as the European Central Bank has their Interest Rate and Policy Statement as well. What is special about this particular meeting is that it’s the first one with new ECB Chair Christine Lagarde. She has spoken several times, but this will be her first policy meeting and first voting round.
(3) Brexit: There will be a popular vote on Thursday. The results will determine how many seats in Parliament each party has and the parties will then determine who the Prime Minister is; although this election is setup as keeping PM Boris Johnson and finally conclude Brexit or go with Jeremy Corbyn and remain a vassal state of the EU.
Treasury Dump
The following is our Treasury auction schedule for the week.
12/9 – 3 year note
12/10 – 10 year note
12/12 – 30 year bond
Market Wrap-up
Treasury Dump
Three year Treasury note auction results: $38B went off at a high yield of 1.632%. Bid to cover ratio was 2.56
Trade Snore
There was nothing really new on the Chinese trade front…just more of the same “both sides want to make a deal” but no official announcement yet. On the NAFTA front, the USMCA deal may finally go up for a vote in the Democratically controlled House by December 18th.
On Deck for Tomorrow
FOMC meeting begins, Non Farm Productivity and Unit Labor Costs, 10 year Treasury Note auction.