What Happened Last Week?
Not as Bad as It Could Have Been
After Wednesday’s Fed-driven sell-off, it was unlikely if not impossible that bonds wouldn’t end up saying they had a bad week. That is certainly still the case, but after Friday, it’s not as bad as it could have been. PCE inflation came in at 0.1% at the core level, month over month. If inflation repeated that performance for 12 months, annual inflation would be below the 2.0% target. Headline inflation is even lower and has been doing even better in terms of getting back to a target trajectory. Bond traders are largely able to price in PCE data because a good amount of it can be calculated from CPI/PPI which come out 2 weeks earlier. There was still enough of a surprise for 10-year yields to drop a quick 6bps and ultimately end Friday 4bps lower than Thursday.
Source: Matthew Graham, Mortgage News Daily 12/20/2024)
What’s on the Agenda for Week?
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Domestic Flavor, (2) Treasury Dump, (3) Holiday Season.
(1) Domestic Flavor: The most important economic release of the week is Consumer Confidence which is expected to tick up 1 to 3 points over the prior reading of 111.7.
(2) Treasury Dump: There is one last round of dumping our debt into the marketplace this year.
- 12/23: 2-year note
- 12/24: 5-year note
- 12/26: 7-year note
(3) It’s the Holiday Season: The bond market started “skeleton crew” mode Friday after the PCE data hit and will be very low volumes basically until after the new year. This week, the market will have a shortened trading session on Tuesday, closed on Wednesday for Christmas, and then reopen for a full session on Thursday.
Market Wrap-up
Domestic Flavor
Stagflation: The November Chicago Fed National Activity Index remained negative at -0.12 and has a negative rolling three-month average of -0.31. This shows rising prices AND economic slowdown.
Rosie the Riveter: November Durable Goods Orders dropped by 1.1% versus estimates of -0.4%. Ex Trans they were down 0.1% versus estimates of +0.3%. Non Defense, Ex Aircraft were up 0.7% versus estimates of -0.1%.
Taking it to the House: New Home Sales in November were low but better than expected, 664K versus estimates of 650K.
State of the Consumer: The Conference Board’s December Consumer Confidence Index dropped from 112.8 to 104.7 but was still in positive territory by staying above 100. Future Confidence levels by party lines saw Democrats plunge and Republicans surge. 12 month inflation expectations were at 5.0%.
Treasury Dump
The 2-year note auction of $69B went off at a high yield of 4.335% and a bid-to-cover ratio of 2.73, and saw a record level of foreign demand.
On Deck for Tomorrow
Richmond Fed Manufacturing Index, 5-year Treasury note auction, bond market early close at 2PM.