What Happened Last Week?
Solid Conclusion to Superlative Week
Friday ended up being rather uneventful for the bond market, as long as you gave the drama time to play out. The drama in question came in the form of seemingly odd comments from NY Fed President Williams who said the Fed isn’t really considering rate cuts. Taken out of context, that was a comical and confusing assertion given that Powell said the opposite on Thursday. Once the market took a moment to appreciate the context, trading levels got right back to where they were before Williams. Specifically, bonds were roughly unchanged from Thursday afternoon–a stance they maintained through the close. With that, bonds managed to have a massively positive reaction to a Wednesday Fed Day WITHOUT having to give any of the gains back via token correction or otherwise. It’s one of the calmest landings we’ve ever seen given the size and pace of the rally.
Source: Matthew Graham, Mortgage News Daily 12/15/2023)
What’s on the Agenda for this Week?
Overview
We are in the Christmas stretch which means an early close for the bond market on Friday and will stay closed until Tuesday. But there is a lot going on this week that can impact MBS pricing.
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Inflation Nation, (2) Central Bank Palooza and (3) Treasury Dump.
(1) Inflation Nation: The Fed’s key measure of inflation, Core PCE, will be on Friday. The bond market will be extremely sensitive to the MOM change.
(2) Central Bank Palooza: The world’s number two and three economies’ Central Banks, China and Japan, will issue information this week. China has a track record of not doing too much at their meetings but has just recently injected a bunch of liquidity into their banking system. The Bank of Japan will get a lot of attention. While their relatively new governor is not expected to raise rates at this meeting, the market is expecting some more definitive guidance on their rate path as they are still at -0.1% and they very well might be the only Central Bank hiking when everyone else is cutting.
(3) Treasury Dump: There is a very important 20-year Treasury bond auction on Wednesday.
Market Wrap-up
Domestic Flavor
Taking it to the House: The December NAHB Housing Market Index was very weak with a reading of 37. Anything below 50 is considered bad.
On Deck for Tomorrow: Housing Starts and Building Permits.