What Happened Last Week?
Mortgage backed securities (MBS) gained 67 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve from the prior week. 30 year fixed rates fell to their lowest levels of 2016 so far.
The Award for the biggest market moving event goes to Japan. The Bank of Japan shocked the financial markets with an unexpected cut to negative interest rates for the first time ever. It dropped their rate down to -0.1% on excess reserves that financial institutions park at their bank. This is designed to force banks to put that money back to work but instead the banks are taking their cash and putting into U.S. bonds which pay a low yield but provide safety. Hey, a low yield is better than a negative one. This caused a big spike in demand for our mortgage backed securities which caused their prices to rise which means that interest rates decreased.
Domestic Flavor
The Talking Fed
Left their key interest rate unchanged.
Here are some points of interest from their policy statement:
-No longer viewing risk as “balanced” between upside and downside which is a significant change in their language.
-Labor market has improved but economic growth slowed.
-Expectations that Inflation will march upward to 2% are reduced.
-Said slow and steady pace of future rate hikes.
The market is viewing this as telegraphing no rate hike in March and this is generally good for back-end pricing but this is basically what was expected and it was not a shock to the system.
We got our first glimpse at the 4th quarter GDP (0.7% vs estimates of 0.8%) and it was pretty much what the market expected given the recent round of negative manufacturing reports, etc. This is not the final number, it will be revised a couple more times. The business side was the biggest drag as our very strong dollar is simply crushing exports. PCE on a QonQ basis hit 1.2%…a far cry from the Fed’s 2% threshold.
Manufacturing
The Chicago PMI for January was a huge beat, coming in at 55.6 vs estimates of 45.0. Any reading above 50 is expansionary, so a reading past 55 is very strong. But what is really interesting is that this “business barometer” had been trending below 50 which is usually a precursor to a manufacturing recession.
What’s on the Agenda for this Week?
This is a huge week for domestic economic data with the market focused on Jobs, Manufacturing and Inflation.
Domestic Flavor
Jobs, Jobs, Jobs: There will be a big helping of labor data that culminates with Friday’s Non Farm Payrolls. We have already seen a Personal Income report that was higher than expected. We also get Unit Labor Costs.
ADP Private Payrolls, Challenger Job Cuts and Average Hourly Earnings will be the focus. This time around, this report is not likely going to change the Fed’s mind on the timing of their first rate hike of 2016, so this report will have less impact than the last one did but still very important this week.
Manufacturing: There will be a large dose of data that starts out with today’s ISM Manufacturing. Will this surprise to the upside as last week’s Chicago PMI reading did? We also have Productivity and Factory Orders. Of course, more than 2/3 of our economic is Non-Manufacturing. And we get a reading on that too with the release of the ISM Services Index on Wednesday.
The Talking Fed:
02/01 Stanley Fischer
02/02 Esther George
02/04 Loretta Mester
Across the Pond
China: Had their sixth consecutive month of contraction in their manufacturing sector as measured by their PMI. The January reading came in at 49.4 which was their lowest reading since August 2012.
Market Wrap-up
Overview
Oil has “tanked” down from $33.33 at 6am to $31.41 at 3:30EST. Yet this drop-off in oil did not cause MBS to improve as it has in the past. That is because it needs to be below $29 for it to have influence on MBS pricing. There was a mixed bag of manufacturing news, weak Construction Spending, the ECB President is out stumping for more QE and China had another disappointing manufacturing report. Yet MBS did not improve. This shows you the power of upper resistance.
Domestic Flavor
Manufacturing: The national manufacturing picture had another month of contraction, coming in at 48.2 vs estimates of 48.0 with the ISM manufacturing report for January. This report certainly didn’t follow the same trend as last week’s much stronger than expected Chicago PMI report. But another report released just 15 minutes earlier (Markit Manufacturing PMI) had its reading hit 52.4 which is expansionary.
The Talking Fed: The Federal Reserve Bank of Atlanta published its GDPNow forecasts for the first quarter and it was lighter than market expectations. You can read it here. While, the overall tone is for light growth, it’s still growth. MBS were not impacted by this report.
Construction Spending did expand but by only 0.1% on a MOM basis (vs estimates of +0.6%) and 8.2% on a YOY basis. November was revised downward from -0.4% to -0.6%. The only silver lining was 0.9% rise in residential construction which offset a big decline in non-residential construction.
Personal Outlays: Our national savings rate ticked up as Personal Income improved 0.3%, but consumers held on to that increase in wages and did not spend it as Personal Spending was flat at 0.0%. Certainly no threat of inflation as the YOY Core PCE was just 1.4%…nowhere near the Fed’s 2% threshold.
On Deck for Tomorrow: Total Auto Sales.
Across the Pond
China: Had their sixth consecutive month of contraction in their manufacturing sector as measured by their PMI. The January reading came in at 49.4 which was their lowest reading since August 2012.
Super Mario: ECB President Mario Draghi was out stumping again today saying that the ECB stands ready to review its monetary policy at its March meeting. He has already said this several times and it had no impact on the long bond market.