What Happened Last Week?
Mortgage backed securities (MBS) gained 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
It was a very quiet week with only a small plate of economic data to digest. As a result, MBS moved sideways. But the good news is that we at least made some gains after selling off for three weeks in a row.
The focus of the long-bond market was on Central Bank action as there was the release of the minutes from the last FOMC meeting and the last ECB meeting.
Federal Open Market Committee (FOMC “The Fed”): We basically have a trade-off among the centrist voting members which is pointing the way to a December rate hike…however to placate those “doves” they are agreeing to make the trajectory of further rate hikes about as thick as a human hair. Most voting members in the October meeting thought a rate hike would be supported in December unless the “data dependent” Fed saw a reversal in our economic trends.
Most saw global risk diminishing but were still concerned about the impact of a rate hike. It is clear that the Fed intended to send the signal that a rate hike is appropriate. This is important because often the market can misunderstand the signals that our Fed gives (or more appropriately ignores the signals because they think that market forces will control the Fed)…here the Fed really did want the markets to anticipate a hike.
European Central Bank (ECB): We got the minutes from their last meeting and they seemed to be very concerned with deflation and not inflation. Deflation, of course, is very scary and not only a symptom of falling commodity prices (which will always auto-correct once supply and demand are normalized) but more it’s more worrisome when it is due to an overall contraction in economic activity. They said that they would reevaluate everything at their December meeting…setting the stage for the ECB easing at the same time that our Fed is tightening.
What’s on the Agenda for this Week?
There is some early pressure on the strong European manufacturing data and comments from OPEC and Saudi Arabia that they will work to support prices (falling oil/commodity prices have offset inflation for a long time). However, a major sell off isn’t expected. Tuesday and Wednesday will have more volatility with GDP and PCE, etc.
This is a holiday-shortened week with a lot of major economic news crammed into just two trading sessions.
The bond market is closed on Thursday in observance of Thanksgiving Day but will reopen on Friday and then close early that day at 2:00EST.
The Big Three: (1) The first revision to the previously released 3rd quarter GDP. Based upon data that has hit since that release, this should be revised upward. (2) Treasury Auctions – there will be two auctions on Wednesday. (3) The state of the Consumer.
State of the Consumer: Both Consumer Confidence and Consumer Sentiment will be released this week. But we also get Personal Income and Spending which will be closely watched and feed directly into the PCE data that the Fed watches so closely.
Housing: We get both Existing Home Sales and New Home Sales. We also get redundant data with the Case-Shiller Home Price Index and the FHFA House Price Index to give a good snap-shot into the health of our housing market.
Treasury Auctions:
11/24 – 2 year note
11/25 – 5 year note and 7 year note
Across the Pond
Eurozone: Manufacturing PMI rose to 52.8 from 52.3, a 19 month high and above the highest estimate (range was 51.5 to 52.6). Not only the Service PMI rose to 54.6 from 54.1, a 54 month high and also above the highest estimate (range of 53.5-54.4), but the Composite PMI soared to the highest level recorded since May 2011, rising from 53.9 to 54.4 (which was also above the highest estimate).
Market Wrap-up
Overview: As expected, MBS have traded in a fairly narrow range and it held, which prevented any major movement lower despite some international news that is generally negative for pricing.
The Talking Fed
Today was Fed Governor Daniel Tarullo. He said there is still a lot of uncertainty on inflation and that the path of interest rate hikes should be influenced by how much inflation moves towards the Fed’s 2% target rate. Tarullo noted that the U.S. economy seemed to be “chugging along” but said low inflation meant that despite strong jobs gains, it was still overall a mixed picture.
Domestic Flavor
Existing Home Sales: Were lighter than market expectations (5.36M vs estimates of 5.50M), but this miss was due to a huge lack of inventory available for sale hitting only 4.6 months. The median price increased for the 44th straight month and now stands at $219,600 which is 5.8% higher than this time last year. Overall it was a decent report.
On Deck For Tomorrow: The first revision (2nd release) of our 3rd quarter GDP, Consumer Confidence and a 2 year Treasury Note auction.