Market Updates
Tuesday, January 19, 2021
Economic Data
Looking ahead to the rest of the shortened week, the calendar remains on the lighter side with Homebuilder Sentiment (Jan) tomorrow, Jobless Claims, Philly Fed (Jan), and Housing Starts/Permits (Dec) on Thursday, and Existing Home Sales (Dec) on Friday. Also of interest to markets will be the inauguration of Joe Biden as the 46th President of the United States tomorrow, as well as, Thursday’s monetary policy decisions from the Bank of Japan and ECB.
Former Fed Chair Janet Yellen, and now U.S. President-elect Joe Biden’s nominee to run the Treasury Department, will tell the Senate Finance Committee this morning that the government must “act big” with its next coronavirus relief package. In her prepared testimony for her confirmation, Yellen also says the U.S. economy must be rebuilt “so that it creates more prosperity for more people and ensures that American workers can compete in an increasingly competitive global economy.” “Neither the president-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big,” Yellen, said in a prepared opening statement for her hearing before the committee. “I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time,” she said in the statement. Yellen will replace current Treasury Secretary Steven Mnuchin if confirmed by the Senate, as Mnuchin is scheduled to step down on Wednesday.
Market Analysis
To recap, we saw the largest spike in 10yr yields over the past 2-week period, something we had not seen in quite a while, nor at the pace at which the sell-off occurred. However, yields recovered late in the week with the help of a few Fed members, especially Chair Powell, squashing any uncertainty over a possible faster than expected ‘taper talk’. Moving into this week, we don’t expect much of a response or move in rates, given the lack of data and scheduled events. With that, the markets will be left to focus on any new headlines out of Washington, while keeping the overall narratives pertaining to the economic recovery, Covid-19 developments, vaccine rollouts, and the expectations for more stimulus, well in place. Looking at the market, after the 10yr hit an overnight high print of ~1.121%, levels have settled modestly lower around ~1.10%. MBS levels are outperforming with the benchmark 2.0 coupon only down -2/32s, with the rest of the coupon stack flat. We will hold the same bias for now with our defined trading range in 10s from ~1.04-1.18%, and we think any improvements in MBS should be taken advantage of.
For Fed operations today, we see a max of $4.768bln including $1.476bln UMBS15 1.5% and 2.0% coupons, followed by $3.292bln UMBS30 1.5% and 2.0% coupon. Since the start of QE back on March 16th, the Fed has purchased a total of $1.519trln in MBS.
Current levels – 10s trading down -4/32s at ~1.10, MBS down -2/32s in our benchmark UMBS30 2.0 coupon, with stocks up +100 points on the Dow.
Have a great week!
Friday, January 15, 2021 ~ Missed this report, I apologize.
Thursday, January 14, 2021
Economic Data
Initial jobless claims for the week of January 9th rose +181k to 965k, the highest print since the week of August 22nd last year (1.011mln). This is also the largest one-week increase since back in the week of March 28 of last year. This now raises the 4-week moving average of claims to 834.3k, the highest in 15 weeks. Continuing claims, which lag a week, rose +199k to 5.271mln. Prior to this week's increase, continuing claims had fallen in each week but 3 since July 18th, and over that time, they fell a total of 11.879mln.
The Labor Dept. reported today that import prices rose +.9% in December vs. the +.2% increase back in November. Looking year over year in December, import prices are still down -.3%, but much better than the -1.0% annualized rate in November. Within the report, fuel prices were up +7.8%, while food prices fell by -.2%. Ex-fuels and foods, prices increased by +.4%. On the exports side, prices spiked by +1.1% in December after a +.7% increase in November. Prices for agricultural products increased by +.6%, while non-ag products jumped +1.3%. Year over year in December, prices are down up +.2%, which is the first annual increase since January 2020.
Headlines &
Other News
In yesterday’s Fed Beige Book release, which covered the period from November 21st to January 4th, comments reflected a slowdown in growth and increased concerns about a further virus spike. The report showed that growth across most Districts was modest, a bit weaker than the "modest or moderate" characterization from the prior report. Contacts in some regional Districts also cited weaker consumer spending, and a majority of Districts noted a shift from in-person to online purchases. As we’ve seen in past releases, manufacturing and residential real estate continued to see better activity. Consistent with the dynamics of the drop in payrolls in December, leisure and hospitality jobs saw cuts, a "growing number of Districts" said the pace of job recovery had stepped down, however, the goods and transportation sectors were cited as areas of strength. Regarding inflation, most indications were modest overall. The broader outlook remained one of cautious optimism as expected, with comments such as, "Although the prospect of COVID-19 vaccines has bolstered business optimism for 2021 growth, this has been tempered by concern over the recent virus resurgence and the implications for near-term business conditions."
Also of note today, the details of President-elect Biden's stimulus proposal are due out this evening. The latest headlines suggest an additional $2 trillion in emergency stimulus for the economy, which is now a much larger figure than the $1.3 trillion number that reports on Wednesday had said was being discussed. With uncertainty around what the actual proposed amount will be, tonight’s announcement could create further market volatility.
Market Analysis
As we mentioned, the next few days will be important to see if Treasuries can hold their ground, especially with more headline risk on tap. By the reaction in yields last night, it was obvious that the market was not pricing in that big of a package, so you can bet that investors alike will be watching the headlines this evening for further confirmation. For now, we have set our short-term 10yr trading range at ~1.04-1.18%, cautiously optimistic that levels can hold support on the high-end even with a larger number from Biden. With the potential for more volatility through the overnight session and possibly into tomorrow, a defensive bias is what we suggest.
For Fed operations today, we see a max of $4.499bln including $2.901bln UMBS30 1.5% and 2.0% coupon, followed by $1.598bln GN2 2.0% and 2.5% coupons. Later this afternoon, the Fed reports on purchases for the week ending January 13th, which are expected to have average $5.8bln per day vs. the recent rise in originator supply of $8.4bln. Following that announcement, the Fed will also release a new 2-week schedule, along with estimates for the mid-January through mid-February time frame. Estimates are at $126bln, which equates to roughly $6.6bln per day.
Current levels – 10s trading down -2.5/32s at ~1.10, MBS flat in our benchmark UMBS30 2.0 coupon, with stocks up +115 points on the Dow.
Wednesday, January 13, 2021
Economic Data
The MBA weekly mortgage applications index increased by +16.7% for the week ending January 8th. Purchase applications rose +8%, and is up by +10% vs. the same week last year. Refinance applications increased by +20%, and is +93% higher than the same week a year ago. "Booming refinance activity in the first full week of 2021 caused mortgage applications to surge to their highest level since March 2020, despite most mortgage rates in the survey rising last week. The expectation of additional fiscal stimulus from the incoming administration, and the rollout of vaccines improving the outlook, drove Treasury yields and rates higher," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Even with the rise in mortgage rates, refinancing did not slow to begin the year, with the index hitting its highest level since last March. Both conventional and government refinance applications increased, with applications for government loans having their strongest week since June 2012." Added Kan, "Sustained housing demand continued to support purchase growth, with activity up nearly 10 percent from a year ago. The lower average loan balance observed was partly due to a 9.2 percent increase in FHA applications, which is a positive sign of more lower-income and first-time buyers returning to the market."
CPI (Consumer Price Index) for December posted up +.4% on headline, and up +.1% on core (ex-food and energy). Looking at the year over year numbers, headline CPI is at +1.4%, with the core holding steady at +1.6% for the third month in a row. On the monthly headline data, we see a big jump in energy price by +4.0%, which included a +10.0% rise in fuel oil, and +8.3% rise in motor fuel. Food prices rose +.4% on the month with stronger contributions from food at home (groceries) and food away from home (eating/drinking establishments). In other sectors, medical care prices continued to weaken, down -.2% on the month, with shelter prices also softer, only up +.1% now for the fifth straight month. Within the wage data portion, real average weekly earnings increased by +.1%, posting the third consecutive month at that same level. Real average hourly earnings for all employees increased by +.4% month over month, based on a +.8% increase on average hourly earnings and a +.4% increase in the consumer price index for all urban consumers. Over the past 12 months, real average hourly earnings increased by +3.7%, while real average weekly earnings rose +4.9%. Overall, inflation at the consumer level came in-line with expectations for December and while we’ve continue to see comments from Fed members around the expected rise, we are still well below the Fed’s 2% target rate.
Later this afternoon, we will see the results from the Fed’s latest Beige Book, along with the release of the most recent Treasury Budget (Dec). Also on tap will be the auction of $24bln in 30yr bonds that will conclude the Treasury’s supply for the week.
Headlines &
Other News
For today, Fed appearances include Board Governor Brainard speaking on “The Economic Outlook and Full Employment,” followed by Vice Chair Clarida who is participating in a discussion on “The Federal Reserve’s Framework: Context and Consequences” later this afternoon. There are also two Fed district presidents speaking virtually on the U.S. economy and monetary policy: St. Louis’ Bullard and Philadelphia’s Harker.
To recap yesterday’s comments, Boston Fed President Rosengren said he's somewhat optimistic about the pace of recovery in 2021 but said the Fed and Congress will need to provide continued support. The rollout of vaccines could drive a robust recovery in the second half of the year that could result in "significant" job gains over the next couple of years, but doesn't expect inflation to hit 2% consistently for at least a couple of years. He also noted that asset purchases should continue until the economy has a firmer footing and expects it will be a while before officials discuss plans for tapering the pace of the program. St. Louis Fed President Bullard was also out speaking yesterday, and still believes the Fed is "not close" to a point where it needs to begin pulling back on the bond buying program. He admitted that financial stability risks are a bit of a concern, but said he's not sure that valuations are too far off the mark. Finally, Cleveland Fed President Mester said she's optimistic about the recovery in 2021, but noted that much of its success will depend on how the vaccine rollout goes. She agreed that policy is in a good place and said the Fed should remain "patiently accommodative."
Market Analysis
In yesterday’s session, the 10yr climbed to ~1.18% in early trading, only then to reverse course to ~1.13% following a stronger than expected 10yr auction, and some more favorable Fedpseak around asset purchases (see above). As we step into things this morning, we find 10s modestly lower around ~1.10% with MBS attempting to keep pace, up +7/32s in our benchmark coupon, with the remainder of the stack flat.
While the move to ~1.10% might suggest that the recent bearish spike in yields has run out of gas, the next few days will be important to see if bonds can hold their ground. With that said, we will remain cautious and look for follow through to resistance at ~1.04%, which could prove to be a bit tough given more headline risks ahead (30yr auction, Biden’s stimulus details, econ data, etc.). If we do see yields turn back again, we know that any close back above ~1.18% does lend itself to a trade to ~1.25-1.28% as next support, but we believe that area would be the cap in yields if we were to see that scenario play out. For the short-term, we are setting the current trading range for 10s at ~1.04-1.18%. With any improvement in MBS, it’s worth grabbing with a few locks.
For Fed operations today, we see a max of $7.107bln including $2.901bln UMBS30 1.5% and 2.0% coupon, followed by $1.598bln GN2 2.0% and 2.5% coupons, and concluding with another $2.608bln UMBS30 2.0% and 2.5% coupons. Since the start of QE back on March 16th, the Fed has purchased $1.5trln in MBS.
Current levels – 10s trading up +10/32s at ~1.095, MBS up +7/32s in our benchmark UMBS30 2.0 coupon, with stocks flat on the Dow.
Tuesday, January 12, 2021
Economic Data
The Labor Department reported Tuesday that there were 6.527mln job openings on the last day of November, which was -105k lower than October, and down -266k from November 2019. Job openings decreased in durable goods manufacturing (-48k), information (-45k), and educational services (-21k). The number of job openings was little changed in all four regions. Also within the data, the hires level rose +67k in November to 5.979mln, while total separations increased to 5.4mln. Within those separations, the quits rate was unchanged at 2.2%, while layoffs and discharges rate increased to 1.4%. Over the 12 months ending in November, hires totaled 70.7mln and separations totaled 75.9mln, yielding a net employment loss of -5.2mln. These totals include workers who may have been hired and separated more than once during the year.
Small business confidence fell by -5.5 points in December to 95.9, bringing the index below its 47yr average level of 98. Nine of the ten metrics declined with a -24 point drop in those expecting economic and business conditions to improve. That decline brought the net outlook for economic conditions from positive territory to -16, lower than during the initial wave of the pandemic. The number of persons expecting real final sales to improve fell -14 points bringing it into negative-net territory also. According to a statement from NFIB's Chief Economist Bill Dunkelberg, "Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation."
Headlines &
Other News
There are five Fed virtual appearances today, beginning with Atlanta President Bostic who is speaking on “Economic Recovery and Addressing Inequality” before the Recording of Talks at GS Episode. To follow, speaking on, “Artificial Intelligence and Financial Services” before the Federal Reserve Artificial Intelligence Symposium, is Fed Board Governor Brainard. Next up is Dallas President Kaplan who will give opening remarks and then participate in a panel with Atlanta’s Bostic before “Racism and the Economy: Focus on Education” event with Boston’s Rosengren also giving brief remarks. Next up is Cleveland President Mester who is participating in a videoconference in the Distinguished Speakers Seminar, European Economics and Financial Centre in London. Kansas City President George is then on tap, talking on the economy and monetary policy outlook before an event hosted by The Central Exchange, and lastly, Boston’s Rosengren is back to speak before the Greater Boston Chamber of Commerce 2021 Economic Review.
The Mortgage Bankers Association's (MBA) latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance decreased from 5.53% of servicers' portfolio volume in the prior week to 5.46% as of January 3, 2021. According to MBA's estimate, 2.7 million homeowners are in forbearance plans. The share of Fannie Mae and Freddie Mac loans in forbearance decreased to 3.19% - a 5-basis-point improvement. Ginnie Mae loans in forbearance decreased 7 basis points to 7.85%, and the forbearance share for portfolio loans and private-label securities (PLS) decreased by 10 basis points to 8.77%. The percentage of loans in forbearance for independent mortgage bank (IMB) servicers decreased 9 basis points from the previous week to 5.92%, and the percentage of loans in forbearance for depository servicers decreased 5 basis point to 5.39%. "The share of loans in forbearance slightly declined for each investor category entering the new year, remaining within the narrow range observed for the last two months," said Mike Fratantoni, MBA's Senior Vice President and Chief Economist. "The data show that those homeowners who remain in forbearance are more likely to be in distress, with fewer continuing to make any payments and fewer exiting forbearance each month. Those borrowers who do exit are also more likely to require a modification to their ongoing repayment plans." Fratantoni continued, "Surging COVID-19 cases caused economic activity to stall in December, with a monthly job loss for the first time since April, and with those jobs mostly concentrated in the leisure and hospitality sector. We expect that this slowdown will prevent any rapid improvement in the forbearance numbers over the next few months."
Market Analysis
Treasury yields climbed further in the overnight session on continued expectations of more larger stimulus measures and higher spending efforts under the new Administration and what is to be the newly-led Democratic Congress. While results from the recent headline risks pointed to a rise in yields, somewhat surprising is that the 10yr yield has now risen roughly +26bps in such a short time period. We ended 2020 in the ~.916% handle, and have now climbed up to ~1.18% in today’s session.
That said, yes there are some bearish signals and concerns that come along with the ‘breakout’ from the recent uptrend channel in 10s since early August. We will caution that a cross above ~1.17% does lend itself to a trade to ~1.25-1.28% as next support. MBS levels have also started to underperform since last week, and while the move/widening of spreads to 10s has been slow, it still raises a bit of a red flag for rates as well. In the same conversation, we think the market looks a bit oversold, given we’ve come up so far and so fast, and we think a top in the 10yr is not too far away. Also, we have to still believe that the Fed would step in if the spike in yields were to continue at a more rapid pace. Bottom line - The days/weeks ahead will be important for bonds, and while sentiment is somewhat mixed on where we go from here, your best bet is to stay defensive and lock your loans in.
For Fed operations today, we see a max of $4.348bln including $1.447bln UMBS15 1.5% and 2.0% coupons, followed by $2.901bln UMBS30 1.5% and 2.0% coupons.
Current levels – 10s trading down -10/32s at ~1.179, MBS down -8/32s in our benchmark UMBS30 2.0 coupon, with stocks flat on the Dow.
Monday, January 11, 2021
Economic Data
There are no scheduled economic releases for today.
Looking ahead to the remainder of the week, tomorrow is light with Small
Business Optimism (Dec) and JOLTS (Nov), then heats up on Wednesday with CPI
(Dec), Treasury Statement (Dec) and the Fed’s Beige Book, followed by Import
Prices (Dec) on Thursday, and concluding with NY Fed manufacturing (Jan), PPI
(Dec), Retail Sales (Dec), Industrial production/capacity utilization (Dec),
Business Inventories (Nov) and Consumer Sentiment (pJan) all of Friday.
The Treasury will also be auctioning off $120bln in supply this week,
kicking off today at 12pm CST with the sale of $58bln in 3yr notes, followed
then by $38bln in 10yr notes tomorrow, and $24bln of 30yr bonds on Wednesday.
Headlines &
Other News
In preparation for the FOMC meeting on January 26-27th, this will
be the last week of Fedspeak before the Committee heads into their blackout
period. For today, we have two officials on tap starting with Atlanta President
Bostic who will participate in a virtual discussion on the 2021 economic
outlook, followed by Dallas President Kaplan who is participating in a virtual
hall “Discussion of Economic Developments and Implications for Monetary Policy”
later this evening. Also worth noting, Fed Chair Powell will be participating
in “A Conversation with Federal Reserve Chair Jerome Powell” at a virtual event
on Thursday hosted by Princeton University. Prior to that on Wednesday
afternoon, the Fed will release its Beige Book also in preparation for the
January meeting.
Market Analysis
Looking at the markets this morning, risk sentiment is a bit
lighter with earnings releases on tap and a slew of economic data in the latter
part of the week. Over in bonds, we continue to see yields bear-steepen with
10s trading ~1.13% vs. Friday’s close around ~1.12%. MBS levels have recently
underperformed vs. their Treasury counterparts by a few 32nds. With 10s trading
above ~1.10%, ~1.17% is what we see as the next level of support, while above
that opens the door for yields to run and for selling pressure to ramp up into
a new trading range into the 1.25% or higher handle. We are now watching MBS on
a closer basis to see if spreads continue to widen further and take over
control. With that, our defensive bias remains.
For Fed operations today, we see a max of $5.946bln including $1.447bln
UMBS15 1.5% and 2.0% coupons, followed by $2.901bln UMBS30 1.5% and 2.0%
coupons, and concluding with $1.598bln GN2 2.0% and 2.5% coupons. On Thursday,
the Fed will also announce a new schedule of expected purchases for the
mid-January to mid-February period, projected to be higher at $126bln which
averages roughly $6.6bln per day.
Current levels – 10s trading down -3/32s at ~1.13%, MBS down -5/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -30 points on the Dow.
Have a great week!
Friday, January 8, 2021
Economic Data
Nonfarm payrolls for December declined for the first time
since April, down -140k on headline, with private payrolls down -95k and
government down -45k. November saw an upwardly revised print, however, reaching
+336k vs. the initial +245k, while the net revisions for the last two months
totaled +135k, helping to somewhat off-set the weaker headline this morning.
Within the report for December, there was a heavy drop in leisure and
hospitality of -498k jobs, which included a -372k drop in food services and drinking
places. Outside of the hospitality sector, other losses were modest, while
others saw some solid gains. Private education fell -63k, with other services
category down -22k. Professional and business services gained +161k, retail
added +121k, construction rose +51k, with manufacturing up a strong +38k.
Transportation and warehousing added +47k, and health care grew by +39k.
Average hourly earnings jumped up by +.8% month over month, driving the year
over year gain to +5.1%. While there seems to be some more gains and hiring in
other sectors in which wages are higher and a lot of major job losses were seen
in lower-wage sectors, this is a bit of an anomaly. The workweek ticked down by
a tenth to 34.7hrs from a prior 34.8. Within the household survey, the
unemployment rate remained unchanged at 6.7%, with the participation rate also
holding steady at 61.5% due to little changes in employment and unemployment.
It’s obvious that the resurgence of Covid-19 cases has made the labor market
recovery even harder and this is bound to be the sentiment until the rollout of
vaccines starts ramping up faster.
Headlines &
Other News
We will hear from only one Fed official today, as Vice Chair Clarida is speaking to the Council on Foreign Relations around the lunch hour.
In other Fed news, Dallas Fed President Kaplan said that he expects U.S. GDP to grow by +4.5-5.0% in 2021, and that yields on Treasuries will rise in response to the improved outlook for the economy. Kaplan added that he believes the Fed should not intervene to prevent yields from rising, which further suggests that the Fed start tapering its purchases of Treasury and Agency MBS as the economy improves. We can bet that investors will continue to listen in closely to Fed comments in the week ahead, especially with a visit from Chair Powell on the schedule.
Market Analysis
There is no discounting the fact that it’s been a wild and crazy week to start off 2021! Markets are continuing to trade with expectations that more stimulus is on its way, and with that comes more Treasury issuance and most likely higher yields. However, we see by evidence today in the jobs report that Covid-19 is still driving the overall look of the economy. That, along with the added Fed support, is helping to keep rates lower and although there have been some comments around tapering MBS purchases, that is most likely at least another 9-12 months away. Yes, we’ve lost a good bit of ground this week in MBS, but overall, levels are still outperforming their Treasury counterparts. The 10yr is off -8/32s trading ~1.11% vs. yesterday’s closing mark of ~1.07%. MBS are down -6/32s in lower coupons, with better levels as you work higher up the stack. Equity markets are taking the jobs losses in stride, but only down -.25% on the Dow.
As far as technicals go, if we see the 10yr close over ~1.10%, then ~1.17% is what we see as the next level of support. Anything over ~1.17% really open the door for yields to run and for selling pressure to ramp up into a new trading range. For now, equities look to continue reaping the benefits as the expectations for more stimulus is at the forefront given the blue-sweep and that will probably dominate market sentiment into the week ahead. Defense is the name of the game for us mortgage goers, and with the current outperformance in MBS, it’s a no brainer to keep hitting the lock button.
For Fed operations today, we see a max of $4.348bln including $1.447bln
UMBS15 1.5% and 2.0% coupons, followed by $2.901bln UMBS30 1.5% and 2.0%
coupons. Looking ahead to next week, the Fed plans to buy up to $21.9bln. On
Thursday, the Fed will also announce a new schedule of expected purchases for
the mid-January to mid-February period, projected to be higher at $126bln which
averages roughly $6.6bln per day vs. the current period of $116.9bln, or
$5.3bln per day.
Current levels – 10s trading down -8.5/32s at ~1.11%, MBS down -6/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -75 points on the Dow.
Thursday, January 7, 2021
Economic Data
Initial Jobless Claims for the week ended January 2nd
were down -3k at 787k from the prior week’s upwardly revised print of 790k
(orig. 787k). Today’s claims number is the lowest since back in the week of
November 28th at 716k. The 4-week moving average is now sitting at
818.8k, which is the lowest since the December 12th week at 814.3k.
Continuing claims, which lag by a week, fell -126k to 5.072mln vs. the revised
print for the prior week of 5.198mln (orig. 5.219mln).
The ISM Services PMI for December rose +1.3 points to 57.2, which is now a 3-month high print. Within the report, business activity rose +1.4 points to 59.4, new orders increased +1.3 points to 58.5, while backlog of orders fell -2.0 to 48.7, and employment fell -3.3 points to 48.2. Also reported, export orders rose +6.9 points to 57.3, while imports fell -3.2 points to 51.8. Most respondents are becoming significantly affected by COVID-19, such as seeing weaker demand, and less availability from employees. While the headline print was stronger, the internals still suggest that the service sector has experienced significant effects during the pandemic. On a slightly lighter note, some of those respondents expect rebounds ahead as greater vaccine distribution takes place.
Looking ahead to tomorrow morning, the BLS December Jobs
Report is the heaviest data point on tap. Expectations are for the headline
print to see an increase of +50k jobs, the unemployment rate to tick up to 6.8%
from 6.7%, and average hourly earnings to drop by -.1% to +.2%.
Headlines &
Other News
We see four Fed speakers participating in virtual events today. Kicking
things off is Philadelphia President Harker who is speaking on the economic
outlook before the Philadelphia Business Journal Economic Forecast. Next up is
St. Louis’ Bullard who is also discussing the U.S. economy and monetary policy
except before “Power Up Little Rock”. Later today, Chicago President Evans is
participating in a moderated Q&A before the Wisconsin Bankers Association
Midwest Economic Forecast Forum, and rounding out the day will be San Francisco’s
Daly is in a panel interview at the Shadow Open Market Committee’s Labor
Markets and the Fed’s Monetary Policy event.
In yesterday’s FOMC Minutes release, the
Committee strengthened their forward guidance to say the current asset purchase
plan would continue until "substantial further progress" towards the
dual mandate was achieved. The Minutes showed support for adopting the new
guidance was unanimous, that nearly all officials favored the current
composition, and that only a couple officials currently had any interest in
shifting purchases to longer maturities. A big question for markets has been
the question of what "substantial further progress" actually means
and how it will be measured. While the new guidance was left open and
intentionally vague, officials did pledge to "clearly communicate well in
advance" of a when the threshold is expected to be met. This could then
possibly be a trigger for the slowing of asset purchases, or taper as they like
to refer to it. Once that time comes, ‘officials said that they expect the
"appropriate evolution" of asset purchases could be similar to that
of asset purchases from 2013 and 2014, where purchase levels were gradually
tapered over several quarters to a pace that held the balance sheet steady for several
years.’
Market Analysis
Treasury yields were negatively impacted by the news stations announcing that the results of the Georgia Senate run-off elections went in favor of the Democrats, as 10s hit ~1.066% overnight after closing around ~1.042%. The closing mark yesterday was the first close over 1% since March 19th. As we work through the morning session today, after the dust has settled from D.C. and the confirmation of the electoral college vote, equity markets are back in rallying fashion with the Dow up over 1%. We are seeing a steeper curve in Treasuries today, with the 10yr around ~1.08%, as MBS continues to outperform, only down -3/32s in lower coupons.
As far as technicals go, ~1.10%, then ~1.17% in 10s is what we see as the next level(s) of support if the current trend continues. Anything over ~1.17% really open the door for yields to run and for selling pressure to ramp up. MBS, while having lost a good amount of pricing over the past 3 days, is still outperforming its Treasury counterparts. Now that we are past some larger headline risk, markets will start to learn more about what the new administration will look like, while keeping both eyes focused on the vaccine rollouts and case counts of Covid-19. For now, equities are reaping the benefits as the expectations for more stimulus is at the forefront given the blue-sweep. Defense is the name of the game for us mortgage goers, and with the current outperformance in MBS, it’s a no brainer to keep hitting the lock button.
For Fed operations today, we see a max of $7.107bln including $2.901bln
UMBS30 1.5% and 2.0% coupons, followed by $1.598bln GN2 2.0% and 2.5% coupons,
and concluding with $2.608bln UMBS30 2.0% and 2.5% coupons. Later this
afternoon, the Fed reports on MBS purchases for the week ending January 6th,
which are expected to average $3.6bln per day vs. $6.7bln in originator
selling. Since the start of QE back on March 16th, the Fed has
purchased $1.48trln in MBS.
Current levels – 10s trading down -13/32s at ~1.083%, MBS down -3.5/32s in
our benchmark UMBS30 2.0 coupon, with stocks up +260 points on the Dow.
Wednesday, January 6, 2021
Economic Data
The MBA weekly mortgage applications index fell -4.2% for the week ending January 1st. Purchase applications fell -.8%, and was +3% higher than the same week a year ago. Refinance applications fell by -6%, and was 100% higher vs. the same week last year. "Mortgage rates started 2021 close to record lows, most notably with the 30-year fixed rate at 2.86 percent, and the 15-year fixed rate at a survey low of 2.40 percent. The record-low rates for fixed-rate mortgages is good news for borrowers looking to refinance or buy a home, as around 98 percent of all applications are for fixed-rate loans," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Despite these low rates, overall application activity fell sharply during the holiday period - which is typical every year. Refinance applications were 6 percent lower than two weeks ago, and purchase activity less than 1 percent from its pre-holiday level." Added Kan, "The steady demand for home buying throughout most of 2020 should continue in 2021. MBA is forecasting for purchase originations to rise to $1.59 trillion this year - an all-time high."
The ADP Employment Report showed a loss of -123k private
payrolls in December vs. expectations of an increase of +88k. This is the first
decline since April. The decline in December followed an increase of +304k in
November, a number revised lower by -3k from the initial estimate. Within the
data, declines were focused mainly within leisure and hospitality (-58k) and
trade/transport/utilities (-50k). Losses were also see in manufacturing (-21k),
and other services (-12k). Positives were seen in professional and business
services (+12k), education and health services (+8k), and construction (+3k).
The ADP report comes two days ahead of Friday’s December jobs report from the
Labor Department, which is projected to show growth of only +50k jobs after the
November increase of +245k.
The Markit Services PMI was revised downwardly for December by -.5 to 54.8. The services print is down -3.6 points from the end of November and now at a 3-month low. Within the index, new business growth fell -.39 to 54.61, however, backlogs improved up +1.9 to 51.79. Employment retreated lower, dropping by -.55 to 53.39, the lowest since July. Future expectations moved higher, up +.14 to 65.44, while still down from November’s 79.36. Commenting on the data, "rising virus case numbers took an increasing toll on the U.S. economy in December, with business activity, order books and employment all growing at much-reduced rates," said Chris Williamson, Chief Business Economist at IHS Markit. "The slowdown was especially steep in the service sector, where stricter social distancing measures hit consumer-facing businesses in particular."
Also on tap this afternoon is the release of the FOMC minutes from the
December 15-16th meeting, and Congress’ certification of the
Electoral College vote.
Headlines & Other News
There are no Fed appearances scheduled for today’s session.
In the Georgia Senate runoff elections, Democrat Raphael
Warnock has been projected to have beaten incumbent Republican Kelly
Loeffler. In regards to the race between Democrat Jon Ossoff and incumbent
Republican David Perdue, it’s still being reported that the winner is too close
to call. Georgia's Secretary of State told CNN last night that there remain
about 200,000 votes still to be counted and expects to have a better sense of
the outcome near mid-day today. As we know, if Democrats win both seats, a
50/50 tie will result in the Senate with Vice President elect Harris breaking
ties.
Market Analysis
Treasury yields are sharply bear-steepening today on the higher possibility
of a blue-wave sweep in Congress. For the first time since March, the 10yr
yield has now crossed over the 1% handle, currently trading ~1.04%. While still
outperforming, MBS are weaker, down -9/32s in our benchmark 2.0 coupon.
In turn, equity markets are spiking higher on the potential that
Democrats, if in control of both the Hill and White House, will further
increase fiscal stimulus to support the economy, thus helping lift and support
global market sentiment through the Covid-19 pandemic. Of course, the ongoing
escalations in Covid-19 cases/deaths, combined with slow rollouts of
vaccinations, continue to be worrisome for markets and global growth as a
whole.
Treasuries have been waiting for these Senate results for some time and that
has allowed the recent trading range to hold, coiling up for a breakout in
either direction. While we’ve seen a trade over 1% today, based on an expected
outcome, we wouldn’t call this a strong bearish breakout to a new defined
trading range just yet. Also what comes into question now, if yields do
continue to climb higher, will the Fed intervene? In that aspect, investors
will be looking into the Minutes release today for any further mention or expectations
of a ‘twist’ into longer-date maturities within the Fed’s portfolio, as well
as, what comments come from Fedspeak in the week(s) ahead.
So, as we are seeing some more red on the rates screens today, we need to be
aware of the risks that the current trend could continue. However, we think the
markets still need further confirmation on a lot of fronts including the
outcome of the Administration, what the Fed’s plans are as a result, the path
of the virus ahead and how quickly vaccine rollouts can speed up, and probably
the most important, when will the economy make a significant turn for the
better. There is a lot at play and the headline risks will continue to drive
markets in the days ahead. We need confirmation that this move today is the
sentiment that will continue. That will take a little time, but the best thing
we can do is stay on our toes and take care of our borrowers in the process.
For now, that means defense.
For Fed operations today, we see a max of $4.348bln including $1.447bln
UMBS15 1.5% and 2.0% coupons, followed by $2.901bln UMBS30 1.5% and 2.0%
coupons.
Current levels – 10s trading down -27/32s at ~1.046%, MBS down -9/32s in our benchmark UMBS30 2.0 coupon, with stocks up +500 points on the Dow.
Tuesday, January 5, 2021
Economic Data
The ISM Manufacturing Index for December rose by +3.2 points to 60.7 vs. expectations of a dip down to 56.6 after November’s print of 57.5. Within the report, the prices paid index increased by +12.2 points to 77.6, it’s highest result since May 2018. We also see a rise in new orders of +2.8 points to 67.9, employment up +3.1 points to 51.5, inventories mostly flat at 51.6 from a prior 51.2, while supplier delivery times rose +5.9 points to 67.6, and backlogs rose to 59.1 from a prior 56.9. Overall, some higher prints here on headline, but as delivery times stretch out further, its obvious that the virus and its resulting lockdowns are still having ill affects within the sector.
CoreLogic released its Home Price Index for November 2020, showing homes prices increased by +1.1% month over month, and now posting up +8.2% year over year. This is the largest annual increase since March 2014. CoreLogic’s HPI Forecast indicates that home prices will increase on a month over month basis by +.2% from November 2020 to December 2020, and on a year over year basis by +2.5% from November 2020 to November 2021. According to Frank Martell, President and CEO of CoreLogic, “The housing market performed remarkably well in 2020 despite the volatile economic state. While we can expect to see lingering effects of Covid-19 resurgences and subsequent shutdown in the early months of 2021, vaccine distributions and stimulus actions should revitalize economic activity and keep home purchase demand and home price growth strong.”
Headlines & Other News
There are two Fed appearances scheduled for today, both at the virtual
AEA/ASSA annual meeting this afternoon. First up is Chicago President Evans who
will participate in a panel discussion, “Federal Reserve Actions During the
Coronavirus Pandemic.” Next up will be New York’s Williams who will chair the
paper session, “The Monetary-Fiscal Nexus with Ultra-Low Interest Rates”.
Market Analysis
For Fed operations today, we see a max of $7.107bln including $2.901bln UMBS30 1.5% and 2.0% coupons, followed by $1.598bln GN2 2.0% and 2.5% coupons, and concluding with $2.608bln UMBS30 2.0% and 2.5% coupons. Since the start of QE back on March 16th, the Fed has purchased $1.468trln in MBS.
Current levels – 10s trading down -10/32s at ~.952%, MBS down -6/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -50 points on the Dow.
Monday, January 4, 2021
~ First UPDATE of 2021 ~ Happy New Year! Let's Make it a Great one in spite of the challenges that may lie ahead. :)
Economic Data
Construction spending rose +.9% in November, while October’s
data was upwardly revised to show spending rose +1.6% vs. the originally
reported +1.3%. Looking year over year, construction spending is up +3.8% in
November. Within the data, spending on private construction rose +1.2%, fueled
primarily by investment in housing. Residential construction rose +2.7% with
single-family construction up a strong +5.1%, while multi-family was
essentially flat. Non-residential spending such as gas and oil, however, fell
-.8% in total for November. Finally, spending on public construction projects
also fell, down -.2% for the month.
The US Markit Manufacturing PMI was revised upwardly by +.6
to 57.1, now +.4 higher than it was at the end of November, and now the highest
level since September 2014. Revisions in output, now up +1.0 to 58.32 was
strong, as new orders rose +.77 to 56.52 as well. Employment was revised
higher, however, up only +.09 to 52.19, still a 3-month high print. The
backlogs index remained low, only up a modest +.02 to 52.26. Within the price
indices, input prices were revised downwardly by -.18 to 65.26, and output
prices down -.23 to 58.57. While those saw some weaker revisions, they are
still better than November’s prints and the highest since April 2018 and May
2011, respectively.
Looking at the remainder of the week’s calendar, we do have
a good number of releases on deck. Tomorrow sees ISM Manufacturing (Dec), we
then have the ADP (Dec) and Factory Orders (Nov) on Wednesday, Thursday brings
ISM Non-Manufacturing (Dec) and Jobless Claims, and then we see the BLS
Employment Report (Dec), Wholesale Trade (Nov), and Consumer Credit (Nov) all
of Friday. In addition, we will also see the release of the latest FOMC Minutes
on Wednesday afternoon.
Headlines &
Other News
Fedspeak returns this week after a holiday break. Today’s lineup sees 4
speakers on tap, all of which are speaking at the virtual AEA/ASSA Annual
Meeting. Chicago Fed President Evans will participate in a panel discussion,
“Economic Prospects and Policies after Covid-19”, when Atlanta’s Bostic will be
taking part in a discussion on “Innovations in Measuring the Economic Impacts
of Covid-19”. Then to follow, Cleveland’s Mester will participate in the
discussion, “Increasing Diversity in Economics: From Students to Professors.”
She will then return later this evening to speak on the economic outlook before
an event hosted by the Korea-America Economic Association.
Most
likely the biggest headlines of the week will come with tomorrow’s two Senate
run-off elections in Georgia. As we know, victories by the Democratic
candidates in both races would flip control of the Senate, and confirm the
‘blue-wave’ just months before Joe Biden’s inauguration. If at least one
Republican candidate wins their race, the GOP will maintain control. If the
Democratic challengers, Ossoff and Warnock win, the Democratic caucus and GOP
would each have 50 members, giving Vice President-elect Kamala Harris the
tiebreaking vote. Some investors are fearful about the economic risks of this
majority, as Democrats would most likely raise taxes and introduce more
corporate regulations. Many believe the 10yr yield could test the 1% handle on
Tuesday if it starts looking as if the Dems will in fact sweep the races.
Market Analysis
As we awake out of the 2020 holiday slumber and kick-off the
first new week in 2021, the bond market is likely to remain range-bound and
quiet until we see the results of the Georgia showdown this week. On top of
that, we have another jobs report come Friday morning that will give a wrap-up
of 2020’s labor market. Add in some FOMC Minutes on Wednesday afternoon, and
it’s safe to say it’s going to be a busy first week full of headlines! In early
trading this morning, we saw equities hit further high record marks, only now
to reverse course (down -2.25%) as coronavirus uncertainty and concerns
continue to rise. In turn, we’ve seen the 10yr trade off its overnight high of
~.95% to around ~.91%, with MBS pricing down -1/32s across the stack.
It’s not out of the question that we could still see a
retest in 10s of the ~.98% high, or higher, this week depending on the GA
Senate results; mainly in belief that a ‘blue-wave’ with a Democratic Congress
is associated with greater spending, more stimulus, etc., thus resulting in
more Treasury issuance, which would ultimately drive yields higher. Now,
results are still up the air, and that sentiment still has time to play out.
Given the outperformance we’ve seen in MBS, even with a spike sell-off in the
10yr, we wouldn’t expect a 1 for 1 move in MBS to the same degree. IF the trend
to new higher yields were to continue, however, at some point mortgage rates
will start to move more rapidly as spreads start to widen back out. So, risk
ahead, potentially yes. Is it all going to be played out within a few days,
probably not. It will still take some time for markets to ‘normalize’ IF a
higher yield environment actually comes to fruition. If it doesn’t and yields
continue to trade the same range we’ve come to know so well, then we expect
much of the same current environment to persist. All in all, there are still
many virus, vaccine, and economic headlines driving markets, so nothing is
written in stone just yet. We just want to be prepared for the potential risks
for rates that lie in the shadows right now. Bottom line - Rates are still at
all-time lows, so it’s a no brainer in our book not to keep hitting the lock
button.
For Fed operations today, we see a max of $5.946bln
including $1.447bln UMBS15 1.5% and 2.0% coupons, followed by $2.901bln UMBS30
1.5% and 2.0% coupons, and concluding with $1.598bln GN2 2.0% and 2.5% coupons.
Current levels – 10s trading up +3/32s at ~.907%, MBS down -1/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -700 points on the Dow.
Happy New Year and have a great week!
Thursday, December 31, 2020
Economic Data
Initial Jobless Claims for the week ended December 26th
declined -46k to 787k from 806k in the prior week (orig. 803k). This now puts
the 4-week moving average of claims up to 836,750, an increase of 17,750.
Continuing claims, which lag by a week, fell -103k to 5.219mln from a prior
5.322mln (orig. 5.337mln). Continuing claims have fallen in each week except
for 3 since July 18th and over that time, they fell a total of
11.732mln. Overall, some good numbers here, although volatility is most likely
playing its part due to seasonality and year-end disruptions in the data.
Looking ahead to next week’s calendar and the first week of
2021, we do have a good number of releases. Monday brings Construction Spending
(Nov), then ISM Manufacturing (Dec) on Tuesday, the ADP (Dec) and Factory
Orders (Nov) on Wednesday, Thursday brings ISM Non-Manufacturing (Dec) and
Jobless Claims, and then we see the BLS Employment Report (Dec), Wholesale
Trade (Nov), and Consumer Credit (Nov) all of Friday.
We also will see the return of Fedspeak next week with
Monday’s docket including Chicago’s Evans, Atlanta’s Bostic, and Cleveland’s
Mester. Appearances will continue throughout the week, and in addition, we will
also see the release of the latest FOMC Minutes on Wednesday.
Finally, the biggest focus of the week will be on the
Georgia State run-off elections on Tuesday, January 5th.
Headlines &
Other News
The Treasury has begun to send out the $600 payments
included in the $900bln coronavirus relief plan, while efforts to raise those
payments up to $2,000 continue to be met with strong opposition. Senate
Majority Leader McConnell said yesterday that he would not separate the plan to
raise those payments from President Trump’s unrelated demands on technology and
election policy. “The Senate is not going to split apart the three issues that
President Trump linked together just because Democrats are afraid to address
two of them,” he said on the Senate floor. The Democratic-held House has
approved a stand-alone bill to increase the checks to $2,000 from $600, as 44
Republicans joined nearly all Democrats in backing the measure. The
GOP-controlled Senate has said it will not pass the checks without attaching
other Trump priorities, ones which they know Democrats will not approve.
Market Analysis
With the early market close today at 1pm CST, and the full
market close tomorrow, there aren’t too many expectations for heavy trading
volumes and a lot of volatility as we close out 2020. This morning, the 10yr is
trading at ~.923% after seeing a very light volume overnight session, while MBS
levels are up +1/32s to +2/32s across the coupon stack, and stocks are opening
mostly unchanged across all indices.
As equity markets continue to be supported by vaccine
developments and stimulus relief, it’s a bit surprising that 10s have held
their tightest range over the past couple of weeks. It shows us just how long
these last few weeks/months have drug out and allowed markets to ‘price-in’
these headlines. Come next week, however, this all could change as we have what
potentially could be ‘the’ big market mover, and that is Tuesday’s Georgia
Senate run-off election. With results still too close to call, the chances of a
larger move or breakout, and one that could be sustained, are high. However the
chips may fall, markets will be ready to react, and we need to be ready as
well. For today and the last day of 2020, it would be surprising to see any
significant moves, especially with an early market close. With that, we still
think it’s a good idea to hit the lock button and start gearing up for your New
Year’s Eve festivities.
There are no Fed MBS operations scheduled for today. Later
this afternoon, the Fed will report on MBS purchases for the week ending
December 30th which are expected to average $5bln per day vs. the
same amount of $5bln per day in origination supply. Since the start of QE back
on March 16th, the Fed has bought $1.462trln.
Current levels – 10s trading up +1/32s at ~.923%, MBS up +2/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -30 points on the Dow.
From your Secondary and Capital
Markets staff, we want to wish you and yours a very safe and Happy New Year!
Here’s to 2021, Cheers!
Wednesday, December 30, 2020
Economic Data
The International Goods Trade Deficit in November rose by +5.5% to $84.8bln from a prior $80.4bln. For the month, imports rose +2.6% ($5.5bln), while exports were only up by +.8% ($1.1bln). Within the import category, the biggest driver was consumer goods, which were up +6.7% ($3.8bln). We also saw contributions from capital goods (+2.0%/$1.1bln), and industrial supplies (+2.9%/$1.1bln). We do see a weaker print in motor vehicles (-3.2%/$1.0bln). On the exports side, most of the gain was seen in industrial supplies ex-petroleum (+1.5%/$.6bln), and foods/feeds/beverages (+4.3%/$.5bln). Minor gains were also logged in miscellaneous goods (+3.9%/$.2bln), and consumer goods (+.8%/$.1bln). Overall, a stronger print in November than expected. Exports are recovering at a slower pace, but on headline, if the numbers hold pace, we should start to see some record highs.
The Chicago PMI in December rose +1.3 points to 59.5, beating out expectations of a dip to 57.0. The December print is encouraging, however, levels are still below the high in September of 62.4 and October’s 61.1. Within the report, production was up by +1.1 points, but new orders saw a dip of -2.0 points. The backlogs index rose +3.6 points, posting the first quarterly average above 50 since Q1 2019. The employment index also saw nice gains, while the prices paid index rose to it’s highest level in over 2 years. Respondents were asked a few extra questions which started off with, "What is your planned business activity forecast for 2021?" A total of 44.9% expected it to be under 5%, while 42.9% saw it between 5% and 10%. The second question asked if businesses planned to adjust 2021 budgets in response to the vaccine roll out over the next few months, and the majority said they did not yet know.
The National Association of Realtors Pending Home Sales Index for November
fell by -2.6% to 125.7 vs. expectations of no change. This is the third
straight monthly decline, however, year over year contract signings are up by
+16.4%. According to the NAR, "The latest monthly decline is largely due
to the shortage of inventory and fast-rising home prices. It is important to
keep in mind that the current sales and prices are far stronger than a year
ago. The market is incredibly swift this winter with the listed homes going
under contract on average at less than a month due to a backlog of buyers
wanting to take advantage of record-low mortgage rates." Broken out by
region, the Northeast fell -3.3% on the month, but is still seeing a +15.3%
increase from a year-ago. In the Midwest, the index dropped by -3.1% on the month,
but is still up +14.1% vs. last year in November. The South decreased by -1.1%
in November, but is up +21.3% from November 2019. Finally, the West fell -4.7%
month over month, but still posts a +10.4% from a year-ago.
Headlines &
Other News
A lot of headlines out of the UK today with lawmakers having approved the
Brexit trade agreement that will be implemented on New Year’s Day. The House of
Commons voted in favor of the agreement, and the country will now emerge from
its Brexit transition period with the EU at 11 p.m. local time on Thursday.
Members of Parliament were reported to have backed the deal by 521 votes to 73
ahead of the Dec. 31st deadline. The bill will now move into the
House of Lords, which is also expected to approve and support it, before then
receiving royal assent.
Also across the pond was news that the UK has authorized the
coronavirus vaccine developed by the Univ. of Oxford and AstraZeneca for
emergency use. The shot is expected to be rolled out next week and will be
added to a Covid-19 immunization program started by Britain in December with
the Pfizer-BioNTech vaccine.
Market Analysis
After seeing Treasury yields climb modestly higher in the overnight session, we are finding some relief, potentially a little bit of month-end buying as well, as we start to work through the morning hours. The 10yr, after hitting a high of ~.956% overnight, has settled back down around ~.936% vs. yesterday’s closing mark of ~.935%. MBS levels are mostly flat to up +2/32s across the coupon stack. Equity markets continue to climb higher into the green, up roughly +.5% on the Dow.
With today as the last full-trading day of 2020 (early market close tomorrow at 1pm CST), it is unlikely to see 10s stray from the range and break-out past the high at ~.98%. Move ahead a week to the January 5th Georgia run-offs, and yes, the risk for yields to climb higher go up depending on those results. So, while a break-out is always possible given the Washington saga that continue on around stimulus, we just don’t feel the current environment justifies the need for a new trading range to possibly be defined until we get a better picture of what the Senate will ultimately look like.
For Fed operations today, we see a max of $7.107bln including $2.901bln
UMBS30 1.5% and 2.0% coupons, followed by $1.598bln GN2 2.0% and 2.5% coupons,
and concluding with $2.608bln UMBS30 2.0% and 2.5% coupons. These MBS
operations today will be the last ones for the year.
Current levels – 10s trading up +1/32s at ~.936%, MBS up +2/32s in our
benchmark UMBS30 2.0 coupon, with stocks up +165 points on the Dow.
Tuesday, December 29, 2020
Economic Data
The S&P CoreLogic Case-Shiller 20-city index rose 7.95%
year over year in October, beating consensus of a rise of 6.95%, and the month
over month the increase was 1.6%, beating expectations of a rise of 1.0% and is
the largest increase since April 2013. The national home price index rose 1.69%
month over month, higher than September’s 1.43%. Phoenix (+12.72% y/y), Seattle
(+11.67% y/y) and San Diego (+11.58% y/y) were the cities with the highest
increase in the price index year over year. These are pretty hot numbers, even
considering the high expectations. With rates still at or near all time lows it
makes sense to expect prices to keep increasing, although there is a risk that
this will price out some potential buyers.
Headlines &
Other News
The House passed legislation that would increase the
stimulus checks to individuals from $600 to $2,000. Mitch McConnell blocked
that legislation this afternoon. McConnell said that he would address President
Trump’s concern that the amount of stimulus payments is not enough, without
giving detail when or if a vote will happen. Several Republicans in the Senate,
including the two Republican Senators from Georgia who are in the runoff for
the state’s senate seats are in favor of the $2,000 checks.
Moderna agreed to double the amount of vaccines it is
supplying to South Korea, increasing the amount to 20 million from 10. The EU
is set to take an additional 100 million doses of the Pfizer vaccine, bringing
the total for the EU to 300 million. Dr Fauci said in an interview with CNN
that officials had hope to have had more people immunized by now. According to
the CDC, about 1 million does had been administered as of December 23rd.
Market Analysis
The news on the larger stimulus checks is happening rapidly,
I would think in the small possibility that legislation is passed to increase
the checks that will increase pressure on the 10 year to move higher. US stocks
had been flat to green most of the morning and with the news of McConnell
blocking the bill for the increase in stimulus checks stocks are moving lower,
especially the Russell 2000 which is a measure of small cap stocks (Russell
2000 is down 2.16%, S&P is down 0.12%). Unless there is some unforseen news
that comes out of Washington I think we will see investors positioning for
month and year end, with the possibility that they start to look towards the
Georgia runoff next week.
Currently the 10 year is at 0.931%, UM30 2’s in Feb are +2+/32, Dow is down 72 points (-0.24%), NASDAQ -58 points (-0.46%), and &P -4.62 points (-0.12%).
Monday, December 28, 2020
Economic Data
There is no economic data today.
This week we have another holiday week, with an early market
close on Thursday for New Year’s Day on Friday. Tuesday we have the S&P
Case-Shiller Home Price Index, while on Wednesday we have Pending Home Sales,
Chicago PMI and Advance International Trade and Inventories. Thursday we have
Initial Jobless Claims.
Headlines &
Other News
President Trump signed the pandemic relief bill Sunday
night, averting a government shutdown and provides aid to US households with a
$600 stimulus check per adult and also provides an additional $300 a week of
additional unemployment benefits. The bill is tallied at $900 billion, with
$325 billion going to small business aid. The House is planning on a vote to
increase the direct payments of the bill from $600 per adult to $2,000 per
adult, which was one of President Trump’s biggest complaints on the bill. Even
if the House passes the increase, the Senate is most likely to not approve the
increase.
Market Analysis
President Trump signing the stimulus bill was a nice surprise
this weekend, and the markets have traded risk-on today with all of the major
stock indexes all in the green and the 10 year higher. Mortgages are trading
better than the 10 year, being relatively flat versus down 8/32 in the 10’s.
The 10 year is at 0.948% currently, making me think the next piece of news that
would potentially push the 10 year over 1% may be the Georgia runoff for two
Senate seats on January 5th. If the two Democratic candidates win
the seats the Democrats will have the majority in the Senate, allowing
President Elect Biden to get more of his agenda passed and the markets would
react with at least rates moving higher as well with the increase in government
spending expectations. Now that there is no longer uncertainty over the stimulus
bill, I would expect a choppy trade over the next few days as we head into
month and year end.
Currently the 10 year is at 0.948%, UM30 2 in Feb is up
0.5/32, the Dow is up 215 points (0.71%), NASDAQ +98.72 points (0.7%) and the
S&P +31.36 points (0.85%).
Economic Data
There is no economic data today, along with an early market
close for Christmas.
Next week we have another holiday week, with an early market
close on Thursday for New Year’s Day on Friday. We have a no data day on
Monday, Tuesday we have the S&P Case-Shiller Home Price Index. On Wednesday
we have Pending Home Sales, Chicago PMI and Advance International Trade and
Inventories. Thursday we have Initial Jobless Claims.
Headlines &
Other News
House Republicans blocked Democrats attempt to increase the
stimulus check payment of $600 to $2,000 that was demanded by President Trump.
The Democrats will try again on a new bill on next Monday, December 28th.
The government is set to run out of funding that day as well so there is a
chance that a stopgap bill is passed to on Monday to avert the partial
government shutdown that is looming.
The UK and the EU have clinched a post-Brexit trade
agreement for when the UK leaves the EU in a week. The agreement will allow for
tariff and quota-free trade in goods after Dec 31st, but it will not
apply to the services or financial services sector, which accounts for 80% of
the UK economy.
Market Analysis
With the early market close and trading desk half staffed I
am expecting a fairly calm day. Even with the Brexit headlines the markets
barely blinked this morning, although that may be due to the fact that we saw
the market move on Brexit headlines yesterday. The markets barely moved at the
Republicans blocking the increase in stimulus checks as well, we may see more
market reaction next week once we know more on if President Trump will sign the
bill with the smaller stimulus check payment or not. At this point the 10
year is still in its upward trend since July, just slowly moving higher. Until
we see a breakout in either direction I would suggest being defensive and
getting your loans locked in, especially when there is green on the screen.
Currently the 10 year is at 0.936%, UM30 2 in Feb is up
0.5/32, the Dow is up 54 points (0.18%), NASDAW +46.45 points (0.36%) and the
S&P +9.84 points (0.27%).
Economic Data
The MBA weekly mortgage applications index increased by +.8% for the week ending December 18th. Purchase applications fell by -5.0%, but are +26% higher than the same week a year ago. Refinance applications increased by +4.0%, and are +124% higher than the same week last year. "Mortgage rates are closing the year at record lows. The 30-year fixed rate - at 2.86 percent - is a full percentage point below a year ago. Last week's increase in refinance applications was driven by FHA and VA activity, while conventional refinances saw a slight decline. Overall refinance activity was 124 percent higher than in 2019, as borrowers continue to seek lower monthly payments or different loan terms," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Purchase applications decreased for the second time in three weeks, as both conventional and government applications saw a drop-off. Despite the decline, purchase applications remained 26 percent higher than the same week a year ago, and the average loan balance reached another record high." Added Kan, "There are still signs of relative strength in the housing market as 2020 ends. However, housing affordability will be worth monitoring next year. The lower loan size segment of the market - particularly for entry-level and first-time buyers - continues to be impacted by rapidly increasing home prices and tight inventory."
Initial Jobless Claims declined by -89k to 803k in the week ended December 19th. Claims for the previous week were upwardly revised by +7k to 892k, so the drop is even more than markets had anticipated. For this reporting week, the 4-week average of initial claims rose +4k to 818.3k, the highest in 10 weeks and a third consecutive increase. Continuing claims, which lag by a week, fell by -170k to 5.337mln for the week ending December 12th. The 4-week moving average of continued claims was 5.538mln, a decrease of -188k from the previous week’s average.Personal income declined by -1.1% in November, while October’s print was revised upwardly by +.1% to -.6%. Personal consumption expenditures fell by -.4%, while October’s numbers were downwardly revised by -.2% to +.3%. The PCE price index was flat on the month and is now up +1.1% year over year. Excluding food and energy items, the core PCE was flat on the month, while it’s year over year rate held steady at +1.4%. The $58.5bln decrease in real PCE in November reflected decreases of $53.7bln in spending for goods, and $12.1bln in spending for services. Within goods, the leading contributors to the decrease were spending for clothing and footwear, as well as motor vehicles and parts. A notable offset was an increase in spending for food and beverages purchased for off premises consumption. Within services, the decrease primarily reflected decreases in spending for food services and accommodations as well as in household utilities. Personal outlays decreased $66.8bln, while personal savings was $2.22trln, putting the personal savings rate as a percentage of disposable personal income at 12.9%.
Durable goods orders rose +.9% month over month in November, while we see upward revisions to October's originally reported +1.3% increase, to now a +1.8% gain. The November gain is now the seventh straight monthly increase, as the pandemic has shifted demand away from services like travel and hospitality towards goods. Orders last month were driven by higher demand for electrical equipment, appliances and components, computers and electronic products, primary metals and machinery. Excluding transportation equipment, orders rose +.4% in November, but orders in this group now rose +1.9% in October, which was +.6 percentage points better than what was previously reported. Orders for nondefense capital goods excluding aircraft also rose +.4% on the month, but October orders now show a jump of +1.6% vs. the +0.8% initially reported. Shipment of core capital goods increased by +.4% last month vs. the +2.6% rise in October.
The FHFA House Price Index increased by +1.5% in October, which follows gains of +1.7% in September, and +1.6% in August. This was the fifth straight monthly increase by at least +1.0%. Compared with the index from October 2019, we see an increase of +10.2%, which is roughly twice the growth rate from October 2018 to October 2019 which was +5.5%. Looking into the 9 regions in the index, home prices increased the most in New England (+2.1%), followed by gains of +1.7% in the Middle Atlantic, Mountain, and Pacific regions. The East North Central rose by +1.6%, the South Atlantic by +1.5%, and the West South Central by +1.2%. Finally, the index rose by +.9% in both the West North Central and East South Central. Compared to a year earlier, the strongest price growth was shared between New England and Mountain, both showing gains of 12.5% year over year. The weakest 12-month growth rate was in West South Central at +8.4%.
New Home Sales for November posted at a seasonally adjusted rate of 841k, an -11.0% decline from the downwardly revised rate of 945k in October (orig. 999k). New home sales are still up +20.8% when comparing the November 2019 number at 696k. The median sales price for a new home sold last month was $335,300, with the average sales price at $390,100. The average price was +1.8% higher vs. October, and is up +1.5% vs. November 2019. The seasonally adjusted estimate of new homes for sale at the end of November was 286k, which represents a supply of 4.1 months at the current sales pace. This is up from the prior 3.6 months back in October, but down from the 5.6 month supply this time last year. Broken out by region, sales in the Northeast fell by -2.5%, but are still up +18.2% annually; the Midwest saw sales on the month tumble by -43.3%, and are now down -24.4% year over year; the South was down -1.9% on the month, and are up +30.5% on the year; the West down -17.3% monthly, but still up +19.8% year over year.
The Univ. of Michigan Consumer Sentiment Index saw its final read in December fall to 80.7 vs. the pre-lim read of 81.4. While the print for this month is up from the November final read of 76.9, it is still well-below last December’s result of 99.3. The gains month over month in December show improvements in the expectations index to 74.6, up from last month’s 70.5. The current conditions index rose to 90.0 from a prior 87.0 back in November.
Headlines &
Other News
After months of negotiations, President Trump has now called the $900 billion Covid relief bill passed by Congress an unsuitable “disgrace.” Last night, the President urged lawmakers to make a number of changes to the measure, including bigger direct payments to individuals and families. He had been expected to sign the legislation into law, along with a $1.4 trillion spending bill to keep the government open. “I am asking Congress to amend this bill and increase the ridiculously low $600 to $2,000, or $4,000 for a couple,” Trump said. House Speaker Nancy Pelosi, one of Trump’s political arch enemies, actually agreed with his call for $2,000 payments. “Democrats are ready to bring this to the Floor this week by unanimous consent. Let’s do it!” she tweeted. It’s not clear whether the larger direct payment would pass muster in the Senate, however, as several Senate Republicans have resisted higher stimulus payments. Senate Minority Leader Chuck Schumer, D-N.Y., urged Trump to sign the current measure but said Democrats would be willing to vote for bigger stimulus checks. “Trump needs to sign the bill to help people and keep the government open and we’re glad to pass more aid Americans need,” Schumer tweeted. While Trump did not yet threaten to veto the bill, the government will shutdown on Monday if the President does not sign the legislation or a stop gap agreement is put in place.
Market Analysis
The last full trading day of the this holiday-shortened week is seeing Treasury yields steeper across the curve, as equity markets trade higher by roughly +.5%. The 10yr touched an overnight low around ~.903%, but has since then been drifting back higher throughout the morning session to ~.968%. MBS levels are outperforming, only down -4/32s in our benchmark coupon, with the rest of the stack down -2/32s.We’re continuing to watch yields with the likelihood of full-on bearish breakout still fairly low, as a new trading range at 1% or higher just doesn’t make much sense with only a few days left to trade in 2020. That said, in the event that the fiscal/stimulus deal is finalized and sentiment in equity markets is boosted further, it’s expected that the path of least resistance for bonds will be towards higher rates. Again, MBS, on an overall spread basis, continue to outperform their Treasury counterparts, so the move in actual mortgage rates will not be a 1 for 1 ‘IF’ 10s stray from the top of the range at ~.98%. All things considered, markets will continue to watch the ongoing saga in Washington, as any new headlines should dictate any further moves and we need to be on our toes in the case things work against us. Best bet, lock your loans.
For Fed operations today, we see a max of $5.7bln including $1.408bln UMBS15 1.5% and 2.0% coupons, followed by $2.737bln UMBS30 1.5% and 2.0% coupons, and concluding with $1.587bln GN2 2.0% and 2.5% coupons.
Current levels – 10s trading down -14/32s at ~.968%, MBS down -4/32s in our benchmark UMBS30 2.0 coupon, with stocks up +170 points on the Dow.
In closing this week, my hope is that you are able to spend some time with your family and friends over the next several days, staying safe and healthy. While this has been a very crazy and tough year, we can’t discard how incredible and amazing it has been for our entire organization. WE have so much to be thankful for, and I want you to know that it’s been my pleasure to write to you all each day. Without you all, my job wouldn’t be possible, so thank you for all that you do and all that you have done this year. I wish you and your families peace, health, and happiness this holiday season, and more prosperity in the year ahead! With that, let’s stir the eggnog, bake the cookies, and get ready for the big guy tomorrow night!
Economic Data
Real GDP increased by +33.4% in Q3, which was slightly
better than market expectations of a +33.1% result. This followed the -31.4%
rate of contraction in Q2, which was the weakest since 1947 when recording
began. In Q3, consumption was revised up from +40.6% to +41.0%, which was an
increase of $8bln. Business investment and intellectual property were also
revised higher, up +$8.4bln total. Real final sales have now advanced by +25.9%
quarter over quarter vs. the +25.6% initially reported. The PCE price index
rose +3.7%, which was an unrevised number, however, the core PCE increased by
+3.4%, which was -.1% lower than in the second estimate. Looking into real
gross domestic income (GDI), Q3 increased by +25.8%, which is short of
recovering the full -32.6% decline back in Q2. The average of real GDP and real
GDI increased by +29.6% in Q3, also not able to make up the decrease of -32.0%
in Q2. Overall, while we see a better recovery last quarter, the economy is
still not expanding, and is still -3.5% below the end of 2019.
The Philly Fed index for general business activity fell by
-26.8 in December from -15.9 in November, which is now the worst print since
May’s -68.6. Looking year over year, the index read in December 2019 was at
13.2. Within the regional index, 40.5% of respondents assessed a decrease in
activity, while only 13.8% noticed an increase in activity. New orders were
down -4.5, sales/revenues down -9.7, and inventories -5.5 posted all negative
results for December. The index for full-time employees fell by -18 points to
-4.2, while the index for part-time/temporary employees fell -15 points to
-10.5. Overall, most components are seeing their lowest levels since June, with
some lowest since May.
Existing home sales in November fell -2.5% to a seasonally
adjusted rate of 6.69mln units according to the National Association of
Realtors. This is the first decline in existing sales month over month after 5
consecutive increases. There were just 1.28mln homes available for sale at the
end of November, which is down -9.9% from October, and down -22% from a
year-ago. At the current sale rate, this represents only a 2.3 month supply,
which is now the lowest print in inventory since 1982. Properties typically remained on the market for 21 days in November, seasonally even with October and down from 38 days in November 2019. Seventy-three percent of homes sold in November 2020 were on the market for less than a month. The median price of an existing home sold last month was $310,800, which is a +14.6% increase year over year. Sales of homes priced under $100,000 were down -22% from a year ago, those priced from $100,000 to $250,000 were up just +2%, while sales on the higher end of the market priced between $750,000 and $1 million were up +85% from a year ago. Looking at the regional breakouts, the Northeast saw sales fall -2.2% on the month, but are up +25.7% from a year ago. In the Midwest, sales fell -2.5% in November, but are
up +24.2% annually. Sales in the South fell -3.8% month over month, but are
still up +25.9% from the same time last year. For the West, sales were
unchanged from the prior month, and are up +27.3% year over year.
Headlines &
Other News
Congress passed new coronavirus relief, along with a government spending
package late Monday. Both chambers easily approved the more than $2 trillion
legislation in votes that dragged late into the night. Congressional leaders
attached $900 billion in pandemic aid to a $1.4 trillion measure to fund the
government through Sept. 30. The House approved the package in a 359-53 vote.
The Senate then passed it by a 92-6 margin. At the same time, Congress
passed a seven-day stopgap spending bill to keep the government open during the
time it takes for the full-year legislation to get to President Donald Trump’s desk. The
package includes a boost to jobless benefits, more small business loans,
another $600 direct payment, and funds to streamline distribution of Covid-19
vaccines. Among the key provisions in the legislation, it adds a $300 per week
federal unemployment supplement through mid-March, and sends payments of $600
to individuals who earn up to $75,000 and couples filing jointly who make up to
$150,000, while also adding another $600 for every child. The measure also will
put $284 billion into Paycheck Protection Program small business loans, while
it will direct more than $8 billion into vaccine distribution, along with $20
billion to ensure Americans receive shots for free. The bill also extends the
federal eviction moratorium through Jan. 31st, and fund $25 billion
in rental assistance. Earlier Monday, Senate Majority Leader Mitch McConnell, called
the bill a “historic rescue package” and said Americans have “waited long
enough” for additional aid. Senate Minority Leader Chuck Schumer, called it “a
good bill” but said it “cannot be the end of the story.”
Market Analysis
Markets have now passed through the last major headwind for
2020 as Congress passed the stimulus and spending bill last night. While we
know the markets were heavily/fully pricing in this result, they can now start
to focus more on year-end positioning, while looking to the horizon and
preparing for the Georgia Senate run-offs on January 5th. This
morning, market reaction has been fairly muted with the 10yr trading ~.921% vs.
yesterday’s closing mark of ~.941%, while MBS levels post small gains across
the coupon stack.
Following sentiment from Monday’s trading session, we see
the reaction today as merely another ‘holding pattern’ for bonds, while equity
markets continue to digest the news headlines and possible further lockdowns
and restrictions that may come as a result of a potential new strain of the
virus overseas. While it’s never a guarantee, we do expect Treasuries to
continue to grind range-bound (.83-.98% in 10s) until something bigger in scope
breaks the current narrative. Looking ahead, market liquidity will start to
thin-out as we work into the latter part of the week, especially as trading
desks move to half-staffed with early and full market closings for the
holidays. We still think the best play in this market is continuing to lock
your loans, as there is just no reason to be holding them.
For Fed operations today, we see the largest total of the week of
$6.928bln, including $2.737bln UMBS30 1.5% and 2.0% coupons, followed by
$1.587bln GN2 2.0% and 2.5% coupons, and concluding with $2.604 UMBS30 2.0% and
2.5% coupons.
Economic Data
In some second-tier news this morning, the Chicago Fed
National Activity Index in November posted at .27, down from October’s revised
level of 1.01 (orig. .87). The index’s 3-month moving average fell to +.56 in
November from +.85 in October. Mostly led by slower employment growth and lower
production-related indicators, 3 out of 4 categories actually made positive
contributions in November, however, levels declined from the previous month. Of
the total 85 indicators in the index, only 49 made positive contributions,
while 36 were negative. While the index and region has seen some higher rebound
from pandemic-related shutdowns, levels still continue to weaken overall.
Looking ahead to the remainder of this week’s calendar, all
data will be loaded into Tuesday through Thursday morning. Economic releases
include GDP (final-Q3), Existing Home Sales (Nov), and Consumer Confidence
(Dec) on Tuesday, followed by Personal Income/Consumption (Nov), PCE (Nov),
FHFA Home Price Index (Oct), Univ. of Michigan Consumer Sentiment (final-Dec),
and New Home Sales (Nov) all on Wednesday, then concluding with Jobless Claims
and Durable Goods (Nov) on Thursday. Markets will see an early close on
Thursday for Christmas Eve, followed by a full close on Friday for Christmas
Day.
Headlines &
Other News
On Sunday, Congress finally reached a stimulus
agreement. ‘The $900bln stimulus package will look to extend federal eviction
moratoriums and key emergency unemployment programs into March. It will also
provide a $300 federal supplement to regular state-level benefits, send
means-adjusted ($75k individual, $150k married) checks directly to taxpayers
($600 per adult and child under 16), provide $325bln for small businesses
primarily through the PPP program, and offer money for several other purposes
such as schools, vaccine distribution, rental assistance, and airlines.’ A
one-day stop gap funding bill was passed late yesterday to avoid a government
shutdown, and give Congress today to vote the plan into law.
In addition to the positive vaccine news over the past
few weeks, there are now some official reports of a new strain of the virus in
the U.K. Medical officials have said the strain appears to be more infectious
than the original, but there is still uncertainty whether it is more dangerous.
However, the concern has been strong enough that many countries in Europe have
now started to ban travelers from the U.K. Dr. Scott Gottlieb, a former U.S.
Food and Drug Administration commissioner, noted in an interview that the
evidence does suggest the new variant transmits more easily. However, he
cautioned, “it doesn’t seem to have mutated the surface proteins of the virus
in a way that they would slip past our vaccines or prior immunity. In fact, we
don’t think that that’s the case.” Gottlieb, a board member of Pfizer, which makes one of
two Covid-19 vaccines to receive limited FDA approval, has also said the mutation does not seem to be more
deadly than previous variants during the pandemic.
Market Analysis
Equity markets, after seeing a bounce off of the heavily
expected $900bln stimulus passage, have now seen sentiment flip and trade
risk-off after the news in the U.K. over the potential new strain of the virus.
While it’s not clear on the full details, it obvious that global risk markets
do not like the headlines, and markets are trading accordingly. In turn, we see
Treasuries rallying, with the 10yr hitting a low of ~.88%, only now to settle
back up around ~.93% vs. Friday’s closing mark of ~.948%. MBS levels are mostly
quiet, unchanged to up +1/32s across the coupon stack.
We see the market reaction today as merely a ‘holding
pattern’ for bonds, while stocks continue to digest the news and possible
further lockdowns and restrictions that may come as a result. The truth is,
markets had the passage of stimulus relief already priced in, so any new
headlines surrounding Covid-19 are surely going to be our market drivers for
the time being. We have some top tier data this week, but that should all come
and go without a hitch. Market liquidity will then start to thin-out as we work
into the latter part of the week, especially as trading desks move to
half-staffed with early and full market closings for the holidays. For us, MBS
continues to outperform on an overall basis, and as we discussed on Friday,
mortgage rates should remain low until something changes that macro narrative.
We still think the best play in this market is continuing to lock your loans,
as there is just no reason to be holding them.
For Fed operations today, we see a max of $5.73bln, including $1.405bln
UMBS15 1.5% and 2.0% coupons, followed by $2.737bln UMBS30 1.5% and 2.0%
coupons, and concluding with $1.587bln GN2 2.0% and 2.5% coupons.
Current levels – 10s trading up +3/32s at ~.936%, MBS unchanged in our
benchmark UMBS30 2.0 coupon, with stocks down -340 points on the Dow.
Economic Data
The Conference Board’s Leading Economic Index (LEI)
increased by +.6% in November vs. expectations of a +.5% rise. October’s
numbers were revised upwardly from a prior +.7% gain to now +.8% vs.
September’s +.7% advance. Within the data, 7 out of 10 components increased in
November, while 3 declined. The largest positive contributions were weekly
jobless claims (+.20%), the ISM New Orders index (+.19%), building permits
(+.17%), the S&P stock price index (+.15%), the yield curve (+.09%), and the
leading credit index (+.08%). Factory orders contributed only a modest increase
of +.01%, while the remaining three components declined slightly, those
including the average of consumer expectations (-.09%), factory workweek hours
(-.07%), and core capital goods orders (-.02%). Looking now at a 3-month
annualized basis, the change in LEI was 8.9% in November vs. the +12.8% in
October, and +17.6% in September. This print today was the slowest 3-month
annualized rate since back in June at -1.1%. However, if we look at the 6-month
annualized rate, we see +18% in November, which is the second highest rate on
record vs. the all-time high of +22.7% back in October. While the report today
shed some light, December’s print would have to out-do this one for November
for those averages to climb, and with the recent rise in jobless claims,
economists have their doubt that will occur.
Looking ahead to next week’s economic calendar, all data
will be loaded into Tuesday through Thursday morning. Markets will see an early
close on Thursday for Christmas Eve, followed by a full close on Friday for
Christmas Day. Economic releases include GDP (final-Q3), Existing Home Sales
(Nov), and Consumer Confidence (Dec) on Tuesday, followed by Personal
Income/Consumption (Nov), PCE (Nov), FHFA Home Price Index (Oct), Univ. of
Michigan Consumer Sentiment (final-Dec), and New Home Sales (Nov) all on
Wednesday. Thursday’s early close will be proceeded by Initial Jobless Claims,
and Durable Goods Orders (Nov).
Headlines &
Other News
Following this week’s Fed
Announcement, today’s session sees Fed speakers back in action. Of note, today
is actually the last scheduled day for Fed members for the remainder of the
year. Things will kick off today with Chicago’s Evans who will deliver opening
remarks before the Project Hometown "Indianapolis after the Covid-19
Pandemic.” Governor Brainard will then follow shortly thereafter when she
speaks on "Climate Change and Financial Regulation" before a Center
for American Progress event.
Discussions continue in Washington today as Congress has
until midnight to pass a relief bill which includes a $1.4trln funding to keep
the government open through next September. There are reports that say a
stopgap bill may need to be passed to allow an additional 48hrs for legislators
to get on the same page. While there are still high expectations for a deal to
get done, especially in equity markets, it’s by no means a given that they will
deliver on the potential for a $900bln coronavirus stimulus deal. “The talks
remain productive,” Senate Majority Leader Mitch McConnell, said
Friday morning. “In fact, I am even more optimistic now than I was last night
that a bipartisan, bicameral framework for a major rescue package is very close
at hand.” In any case, Congressional leaders have pledged to work through the
weekend and pass a bill before they head home for the holidays.
Market Analysis
We’ve made it through another week of 2020, with only a
couple of shortened-holiday weeks left to go… only 8 total trading days left
including the early closes on Christmas Eve and New Year’s Eve, to be exact.
While equity markets continue to enjoy the ongoing, overall support from an
accommodative Fed, more positive vaccine efforts, and optimism that there is
some form of progress out of Washington, the bond market has really held its
ground, staying range-bound, and seems to be now looking ahead to 2021. While
bonds, specifically in the long-end of the curve, didn’t receive all the gifts
from the Fed that it would have wanted, it doesn’t mean that any twist or
change to the Committee’s portfolio of purchases are off the table. What’s also
supporting a steady market in rates? Well, let us not forget that Covid-19
cases are continuing to rise, and the labor market is seeing more slack over
the past few weeks as jobless claims climb higher.
So what’s next for the 10yr and MBS? We’ve established the
trading range from ~.83% to .98% in yields, and while a relief passage would
challenge the upper-end as we’ve talked about, it doesn’t really tell us how
poised momentum would be to see significantly higher yields into the new-year.
Even with a passage of some form by Congress this week, does it really make
sense for yields to define a new, higher trading range with only 8 days left in
the year? We would say no. Not to say the new year can’t and won’t see some
higher yields, but the next event risk comes in early January with the Senate
run-off in Georgia, and that is what investors will be focusing in on. For MBS,
the steady outperformance vs. Treasuries has continued to keep spreads tighter,
thus helping interest rates remain around all-time lows . If yields do start to
trek higher, we still think the move in mortgage rates will be more muted, that
is, until we see those spreads really start to widen out and the outperformance
starts to diminish. As far as the Fed goes, they should continue to support
rates with large amounts of MBS purchases, and there is no mention or
expectation for those amounts to ‘taper’ off any time soon. For now and the
foreseeable future, it seems lower for longer lives on, and we think that
continues until a fundamental shift in the overall landscape of the markets
occurs. Game on.
For Fed operations today, we see a max of $6.9bln, including
$2.737bln UMBS30 1.5% and 2.0% coupons, followed by $1.587bln GN2 2.0% and 2.5%
coupons, and concluding with $2.604bln UMBS30 2.0% and 2.5% coupons. Since the
start of QE, the Fed has purchased $1.42trln in MBS.
Current levels – 10s trading down -2/32s at ~.941%, MBS up +1/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -120 points on the Dow.
Have a great weekend!
Economic Data
Initial Jobless Claims for the week ending December 12th,
rose +23k to 885k vs. the prior week’s upwardly revised print of 862k (orig.
853k). This week’s result was the highest since the week of September 5th.
The 4-week moving average of headline claims has now risen to 812.5k from
778.3k, and is now the highest in 8-weeks. Continuing claims, which lag by a
week, fell -273k to 5.508mln, which was a larger decline than expected, and
reversed last week increase of +254k. Continuing claims had fallen in each week
but 3 since July 18th, last week being one of those, and over that
time, they fell a total of 11.443mln.
Housing starts in November increased +1.2% to 1.547mln from a revised
1.528mln in the prior month (orig. 1.53mln). Single-family starts rose only
+.4% month over month to 1.186mln, while multi-family starts increased by +8.0%
to 352k, accounting for most of the headline result. Building permits were up
+6.2% in November to 1.639mln, with single-family up +1.3% to 1.143mln, and
multi-family up a strong +22.8% to 441k. Overall, this was the strongest pace
of starts since back in February, while it was the best reading for permits
since September 2006. Household formations have risen to a 3mln average over
the past 12 months, which is roughly double the pace of housing starts. Existing
homes have done a decent job of meeting some of the demand, but those
inventories have also begun to fall at a more rapid pace as we’ve seen over the
past few months. New home sales have seen their inventory to sales ratios drop
to their lowest levels in 60 years.
The Philly Fed’s Manufacturing Survey dropped -15.2 points
to +11.1 for December, much lower than expectations of a +20.0 print. Within
the data for the month, new orders fell -35.6 points to +2.3, which is a
seven-month low. Unfilled orders also fell strongly down -20.8 points to +1.4,
the employment index dropped -18.7 points to +8.5, it’s weakest read since back
in June. In the forward looking indices, the expected activity index fell -5.1
points to +39.2, down from October’s high at +62.7, while expected shipments
rose +2.2 points to +45.3, and expected employment was up +4.8 points to +41.0.
Overall, manufacturing continues to see disruptions from Covid-19 in both
demand and the labor force, something that is expected to continue into the
months ahead.
Headlines &
Other News
To recap yesterday afternoon, the FOMC voted to
keep its target overnight rate range unchanged at 0.00-0.25%, indicated it
would continue to expand its portfolio at a pace of $120 billion per month,
provided vague qualitative forward guidance, raised their economic projections,
and maintained their collective view that rates will remain unchanged over the
forecast horizon. The Official Statement was modified slightly to include
“qualitative outcome-based guidance.” The Statement no longer says that the
Fed will grow their portfolio holdings “over coming months,” but now states
that they will do so “until substantial further progress has been made toward
the Committee’s maximum employment and price stability goals.” The new
forward guidance adds very little insight, but replaces the temporary
description of the asset purchases. Instead of saying that they will grow
their portfolio holdings “at the current pace,” the Implementation Note was
modified to be more specific that they will purchase $80 billion Treasuries and
$40 billion MBS securities each month. There was no mention of any changes to
the bond buying average maturity (WAM).
Within the Summary of Economic Projections (SEP), we
received an improved economic outlook. The economy is now expected to
contract only 2.4% in 2020, up from the expected 3.7% contraction in the
September SEP. It is expected to expand 4.2% in 2021, and then by 3.2% in
2022, up from 4.0% and 3.0% respectively. However, we did see that the longer
run growth rate was dropped from 1.9% to 1.8%. The labor market is now
expected to recover more quickly, with the unemployment rate now projected to
end 2021 at 5.0% and 2022 at 4.2%, down from 5.5% and 4.6%
respectively. Despite the positive revisions, inflation is expected to remain
below-target through 2023. Despite the improved economic outlook, the Dot Plot
shows only minor changes with the majority of Committee members expecting the
target rate to remain anchored at zero through the end of 2023. There is still
only one participant who expects to raise rates by year-end 2022, and that
person now only expects a 25 bps increase, which is down from a prior 50 bps
increase. There are also now five participants who expect to hike by
year-end 2023, but twelve who expect rates to remain at zero.
Market Analysis
After hitting a high of ~.935% in the overnight session, 10s
are back at the ~.90% handle in early trading. MBS levels are attempting to
keep pace, but only up +3/32s in our benchmark coupon. Supported by the
continued hopes of a soon-to-be-signed deal from Congress around stimulus
relief, equity markets are in the green as well this morning, up around +.5%.
So, now that the Fed has passed, the markets will continue
to focus on any headlines from Washington, while more or less, preparing for
the holidays next week. The Fed’s decision to hold on any changes to the WAM of
their QE measures was immediately met with a steepening of the longer-end of
the Treasury curve, as expected. However, that move was short-lived, as buyers
came off the sidelines after what was characterized as a ‘friendly’ presser
with Chair Powell reiterating that the Fed remains overly accommodative, and
reaffirming that it will be some while before we see any reduction on the pace
of asset purchases. It’s obvious too that with a modest reaction to the
announcement, markets are more focused on fiscal and vaccine efforts ahead.
That sentiment should dominate any trading moves now into year-end. Overall, we
are still watching the top of the range around ~.98% as support, with a break
above lending the 1% handle, and a new, higher trading range to follow. We
still think the current environment is a defensive one for bonds, especially if
we see a deal before the weekend. Best bet, lock ‘em if you got ‘em.
For Fed operations today, we see a max of $4.142bln,
including $1.405bln UMBS15 1.5% and 2.0% coupons, followed by $2.737bln UMBS30
1.5% and 2.0% coupons. Later this afternoon, the Fed will report on MBS
purchases for the week ending December 16th, which are expected to
average $5.4bln per day vs. originator supply of $7.6bln over the same time
period. Since the start of QE, the Fed has purchased $1.413trln in MBS.
Economic Data
U.S. Retail Sales dropped for a second consecutive month by
-1.1% in November. Excluding automobiles, gasoline, building materials and food
services, retail sales declined -.5% last month. Data for October was also
downwardly revised to show sales down -.1% vs. up +.3% as previously reported,
and is now the first decline since April. Looking year over year for November,
sales are still +4.1% higher vs. the same period last year. Back into the
monthly numbers for November, the weakness spanned a number of key categories,
with vehicle sales dropping -1.7% on the month, electronics sales falling -3.5%
and clothing sales declining by -6.8% from October. Restaurants and bars were
hard hit as many cities and states introduced new pandemic-related
restrictions, with receipts dropping -4% on the month. Consumers spent less
than last year over a five-day period, including Black Friday and Cyber Monday,
as increased online shopping was offset by fewer people visiting physical
stores during the pandemic. According to a survey by the National Retail
Federation, people spent an average of just under $312 on holiday-related
purchases from Thanksgiving to Cyber Monday, which is down -14% from 2019.
Finally, looking at some year over year rates, retail trade sales are +7.1%
above 2019, non-store retailers were up +29.2% year over year, while food
services and drinking places were down -17.2% from November 2019.
According the NAHB/Wells Fargo Housing Market Index,
homebuilder confidence fell in December after posting three-straight months of
record highs. For December, sentiment fell -4.0 points to 86, which is still
the second highest reading in the history of the series. Looking year over
year, the index posted a 76 print in December 2019. Of the index’s three
components, current sales conditions dropped -4.0 points to 92, sales
expectations in the next six-months fell -4.0 points to 85, and buyer traffic
also decreased -4.0 points to 73. Looking at the three-month moving averages,
builder sentiment in the Northeast fell -1.0 point to 82, the Midwest was up
+1.0 point to 81, the South rose +1.0 point to 87, and the West increased by
+2.0 points to 96. “The issues that have limited housing supply in recent
years, including land and material availability and a persistent skilled labor
shortage, will continue to place upward pressure on construction costs,” said
NAHB Chief Economist Robert Dietz. “As the economy improves with the deployment
of a COVID-19 vaccine, interest rates will increase in 2021, further
challenging housing affordability in the face of strong demand for
single-family homes.”
Headlines &
Other News
It’s Fed day once again! Here we are with most likely the
biggest, potential market mover on tap for the remainder of 2020 with today’s
FOMC Announcement. It is expected that the Fed might see a brighter, more
improved longer-term outlook when it releases its economic forecasts. This
notion, primarily due to the recent vaccine news and developments, is strongly
expected. However, what investors are watching for, and what we have talked
about all week, is whether the Committee decides to adjust and implement
immediate changes to its bond buying programs. The argument is not whether the
Fed will or will not increase the size of the $80bln in Treasury purchases, but
rather if they increase the purchases towards the longer-end with 10s and 30yr
bonds. Call it a twist. This would obviously help longer-term rates, such as
mortgages and other loans. However, there is a strong consensus that the Fed
will simply mention, or elaborate on what would prompt them to make those
changes, instead of actually making changes at this time. Rates remain low and
it is still unknown on just how much Congress will provide in stimulus support
and relief, and some investors believe the Fed needs to still wait and see what
is to come from the Hill, and that the Fed might need to see if the economic
situation deteriorates further. We will hear the Official Statement and Summary
of Economic Projections (SEP) at 1pm CST today, followed by Chair Powell’s
presser around 1:30pm CST.
While no stimulus agreement was reached during
U.S. trading hours yesterday, Senate Majority Leader McConnell said,
"We're still talking to each other, and I think there's an agreement that
we're not going to leave here without the omni and a COVID package." Later
in the evening, after the second round of talks wrapped up, McConnell said
"We're making significant progress and I'm optimistic that we're going to
be able to complete an understanding sometime soon." Senate Minority
Leader Schumer made similar remarks to reporters and Speaker Pelosi said talks
would continue today. As of this morning, we are now seeing headlines that
leaders could announce a $900bln coronavirus relief deal at any time, and that
it will likely get passed before the weekend.
Market Analysis
Yields are climbing through the morning session on reports that there will
be a stimulus deal announced today. We saw the 10yr yield touch a low of ~.901%
in the overnight session, but has since then drifted back higher to around
~.935% vs. yesterday’s closing mark of ~.921%. MBS levels are continuing to
outperform, down -1/32s across the coupon stack.
Nothing new folks that we have not mentioned in commentary this week. Today
is all about the Fed and whether they make a move in the WAM, or whether they
decide to sit on their hands and wait. Either way, this is most likely a bigger
move for Treasuries than MBS, so we would not expect any sell-off or rally to
be a 1 for 1 move. If the Fed does nothing, we would expect 10s to trade
towards 1% or higher, but if they were in fact to make adjustments in purchases
towards the longer-end, we could see 10s potentially drop back into the ~.80%
handle in the short-term. To add, if there is a stimulus deal announced and the
Fed holds on adjusting its purchases, it would be a strong, double negative for
yields over the next few sessions. In any case, we still feel it’s best to take
any risk off the table, lock ‘em and square up.
For Fed operations today, we see a max of $6.928bln, with
two of those being in UMBS30 - $2.737bln in 1.5% and 2.0% coupons, and
$2.604bln in 2.0% and 2.5% coupons. We will also see $1.587bln of GN2 2.0% and
2.5% sandwiched in between.
Current levels – 10s trading down -7/32s at ~.935%, MBS down -1/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -10 points on the Dow.
Economic Data
Industrial production rose +.4% in November, just slightly better than
expectations of a +.3% increase. However, we do see downward revisions to
October’s print, now at +.9% vs. the originally reported gain of +1.1%. Some
better news from the November report is that core factory output jumped up by
+.8%, with October’s output up another tenth to +1.1%. Digging through the
numbers for the current release, total output is still down -4.9%, but factory
output is now down only -3.7%. Expectations are for the deficits there to be
made up in the first half of next year. Manufacturing was aided by a recovery
in motor vehicle assemblies, up to a 11.26mln annualized rate, which equates to
a +5.2% rise in consumer autos. Overall consumer goods output slipped -.2%,
however, with durables up +2.7% but nondurables down -1.1% thanks to a -5.2%
fall in consumer energy. Business equipment output rose +2.0%, construction
supplies ticked down -.1%, and business supplies slipped -.5%. Overall
materials output rose +.7%, on a +.7% rise in non-energy and a +.6% rise in
energy. By industry, sectors that had a good month were motor vehicles (+5.3%),
primary metals (+3.8%), paper (+2.0%), aerospace (+1.8%), computers (+1.1%),
and miscellaneous (+1.9%). On the weaker side were apparel (-1.5%), textiles
(-1.2%), plastics (-1.0%), printing (-.9%), and petroleum (-.8%). Finally,
capacity utilization rose +.3 pp to 73.3%, as the prior month was revised up to
73.0% from 72.8%. Factory utilization rose +.6 pp to 72.6%, mining was up +1.9
pp to 79.4%, and utility utilization fell -3.3 pp to 70.2%.
The NY Fed’s Empire State Manufacturing Survey saw its December result down
to +4.9 from a prior +6.3. This is now the lowest the index has shown since
August and suggests output continues to recover at a slower pace. ISM-like
weighting put the composite at 53.0, up from 51.2 in November and the highest
since February. Within the data, we see gains in shipments (up +5.8 to +12.1),
the number of employees (up +4.8 to +14.2), and delivery times (+3.6 to +4.3).
The new orders index fell modestly to +3.4 from a prior +3.7, while the
unfilled orders index rose up +8.3 points to -3.6, which is still negative but
to the smallest number since back in July. Prices paid index rose +8.0 to
+37.1, its fifth straight increase and highest level since December 2018, while
the prices received index fell -1.3 points to +10.0. Looking at future
conditions figures, we see modest improvements, starting with a +2.4 point
increase in the six-month ahead business conditions index to +36.3, which is a
three-month high. The ISM-like composite came up from 59.7 to 60.3, primarily
on gains in expected inventories (up +3.7 to +15.0) and shipments (up +4.5 to
+32.7). Though expected new orders dropped (down -.6 to +32.3), unfilled orders
rose to its highest level since February 2018 (up 9.7 to +14.3).
Import prices for November rose +.1% after falling -.1% back in October.
Looking at the year over year change, import prices are down -1.0%. Within the
report, most of the increase last month was due to a +49% jump in natural gas
prices, now the largest in roughly two-years, and a rise of +2.1% in petroleum
prices. Excluding fuel, import prices dropped -.3%, which is the biggest
decline since April. The rise in petroleum was offset by cheaper food and motor
vehicles. Food prices fell -2.2%, while the cost for imported capital goods
rose +.1%. The cost of imported motor vehicles dropped -.1%,while prices for
consumer goods ex-autos was flat on the month. Export prices, on the other
hand, rose by +.6% in November, supported by gains in the prices for
agricultural and non-agricultural products. After declining -1.6% year over
year in October, export prices are back to -1.1% annually in November.
Economic Data
Today is a no-news day on the economic calendar.
Looking to the remainder of the week, we will see data pickup with NY Fed
manufacturing (Dec), Import Prices (Nov), and Industrial Production/Capacity
Utilization (Nov) on Tuesday, Wednesday then brings Retail Sales (Nov), Markit
Manufacturing and Services PMI flashes (Dec), Business Inventories (Oct), and
NAHB HMI (Nov), followed by Housing Starts/Building Permits (Nov), and Philly
Fed Manufacturing (Dec) on Thursday, and concluding with Leading Indicators
(Nov) on Friday.
Headlines &
Other News
The biggest news of the week, and really for the remainder of 2020, is bound
to come on Wednesday when the FOMC concludes its 2-day meeting with the
Official Statement, updated SEP (Summary of Economic Projections), and Powell
post-meeting conference. While a decent amount of investors expect no changes
to rates, nor the amount of bonds that the Fed is currently buying, there are
some expectations that the Committee will ‘twist’ the WAM (Weighted Average
Maturity), or simply put, the proportion of short-term bonds vs. longer-dated
bonds in the Fed’s portfolio. As of now, the sides are split, meaning there’s
no definitive answer yet as to what the Fed does and how the market will in
fact react. Our expectations are that if the Fed sits on its hands and does
nothing, then we are bound to see yields continue to rise and push to 1%,
possibly higher into year-end. If the Fed does in fact twist the portfolio into
those longer-dated maturities, then we would expect yields to fall back into
the ~.80% handle or lower, and would further signal a lower for longer period
for longer-term rates.
Reports out of Washington note that we will see two fiscal relief bills
being proposed on the Hill today. Both bills, while totaling the same size of
roughly $900bln, are different with the clauses for aid to state and local
governments. Democrats favor the one that includes these provisions, while
Republicans favor the one that drops them. Expectations are that Congress will
still combine some form of government fiscal funding with one of these bills,
as another deadline approaches at midnight, this Friday.
Market Analysis
Sentiment shifted risk-on with Treasury yields climbing higher overnight as
inoculations of the Pfizer-BioNTeach vaccine begin today in the U.S., Congress
extended their shutdown deadlines through this week, and the UK and EU agree to
continue Brexit negotiations on a trade deal. Since the morning session opened,
we now find 10s back down to ~.90% vs. Friday’s closing mark of ~.891%. MBS
levels are outperforming, up +2/32s in our benchmark coupon, with the rest of
the coupon stack up +1/32s. Stocks are also holding their gains, up +135 points
on the Dow, with the S&P up +.5%.
The 10yr continues to be locked within the range from ~.83 -~.98%, and while
yields have not been poised enough to test and cross through the 1% handle yet,
they have not been motivated to put in lower marks under our defined range low
either. As mentioned above, what dictates the next 10-20bps move in yields will
most likely depend on the outcome of Wednesday’s Fed announcement. These next
two days will be a good chance to shore up your pipelines and get ready for the
fireworks come Wednesday around 1pm CST. Still a good bet to be defensive until
something tell us differently.
For Fed operations today, we see a max of $4.142bln,
starting with $1.405bln UMBS15 1.5% and 2.0% coupons, followed by $2.737bln
UMBS30 1.5% and 2.0% coupons. For the week, the Fed plans to buy $27.869bln,
which equates to $5.6bln per days on average. For the new period of December 14
through January 14th, the Fed announced expected purchases that
total $116.9bln, which equates to $5.3bln per day on average.
Current levels – 10s trading down -1/32s at ~.901%, MBS up +2/32s in our
benchmark UMBS30 2.0 coupon, with stocks up +135 points on the Dow.
Economic Data
PPI for November came in +0.1% month over month (m/m),
meeting market expectations. PPI ex food and energy missed expectations of
+0.2% m/m, coming in only +0.1%, while PPI ex food, energy and trade services
also came in +0.1% m/m. PPI year over year came in +0.8%, higher than survey
expectations of +0.7%, PPI ex food and energy up +1.4% y/y, missing
expectations of 1.5%, and PPI ex food, energy and trade was up 0.9% y/y. The
goods index rose 0.4%, with the increases in food of 0.5% and 1.2% in energy,
with the majority of the increase in energy being within diesel +8.4%. We saw
the services index was flat and the trade index was down 0.3%. Overall these
numbers are slightly lower than expected.
University of Michigan’s preliminary reading for December’s
Consumer Sentiment was at 81.4, beating expectations of 76.0, and was up from
November’s 76.9. The current conditions index was at 91.8, up from November’s
87.0, while the expectations index was at 74.7, up from November’s 70.5.
Inflation expectations for 1 year is at 2.3%, down from November’s 2.8%, while
the 5-10 inflation expectation is did not change from November, at 2.5%.
Interestingly, the expectations index at 74.7 is the lowest it has been in a
December since 2013. All in all a nice beat, it will be interesting to see how
the index changes once we reach the end of December.
Looking to next week, we have no data releases on Monday, on
Tuesday we have Industrial Production and Import and Export Price Indexes.
Wednesday we have Mortgage Applications, Retail Sales, Markit PMI, the NAHB
Housing Market Index and the FOMC Statement and Fed Chairman Powell Press
Conference. Thursday we have Building Permits, Housing Starts, and Initial
Jobless Claims. On Friday we have Leading Indicators.
Headlines &
Other News
This afternoon the Senate passed a one-week funding bill to
prevent a federal shutdown, although there are no indications that a stimulus
deal is imminent. The state of New York announced that they would be closing
all indoor dining in New York City due to a spike in Covid-19 cases.
British Prime Minister Boris Johnson said Thursday evening
there is a strong possibility that the UK will leave the EU without a free
trade deal at the end of the month. The European Commission President Ursula
von der Leyen agreed with Johnson’s comments, saying that there is a greater
probability for no deal than deal.
Market Analysis
As we head into the weekend the markets are risk-off with
the negative headlines on stimulus and Brexit. Last week we were testing the
highs of the channel the 10 year has been trading in since August, now we are
back in the middle of the channel at about 0.89% on the 10 year. I expect the
markets to trade off of vaccine and stimulus news next week, while the Fed
meeting on Wednesday may be the last tradeable event of 2020, with there the
possibility the Fed extending the weighted average maturity of their asset
purchases. The Fed has been extremely dovish this year so it wouldn’t surprise
me, although I also think that Fed Chairman Powell would still like to have
some additional tools to improve the economy in the case that things worsen. As
I said earlier, we are in the middle of our trading range in the 10 year, but I
still would be defensive and get your loans locked in, it feels like eventually
we will see progress with the stimulus and the vaccine, and that may send rates
above 1%, best to be safe, especially with the rally in the 10 year that we
have seen.
Right now the 10 year is at 0.8915%, the UM30 2’s in Feb are
+2.5/32, the Dow is 45 points (+0.15%), and the S&P is down 5.00 points
(-0.14%).
Have a great weekend!
Economic Data
Initial Jobless Claims rose +137k to 853k over the prior
week’s upwardly revised level of 716k (orig. 712k). We had seen 8 weeks since the
last 8-handle in claims on a seasonally adjusted basis. Continued claims, which
lag by a week, jumped +230k to 5.757mln, now the first increase in 13 weeks and
the fifth largest increase since the end of April. Although we see a rise, the
4-week average fell another -260k to 5.936mln, and is the 28th
consecutive weekly decline in that average for continuing claims. Expectations
ahead are that we might have seen the low of claims for the time being, and we
might start to see headline numbers back up into the 8-900 range for the rest
of the year. Continued claims will most likely follow that sentiment, as we
could see numbers back into the 7-9mln range over the next few weeks.
Headlines &
Other News
The House passed a one-week government funding extension in yesterday’s session as Congress continues to try and strike up a deal around spending and pandemic relief. The legislation will now head to the Senate, where Majority Leader Mitch McConnell has indicated that he aims to pass it before the deadline. Congressional leaders hope to reach an agreement on a spending package to fund the government through September 30th, which is reported to total around $1.4trln. In addition to that package, both McConnell and House Speaker Pelosi have said they want to attach pandemic aid measures to the full-year spending bill as well. As we know, Treasury Secretary Steven Mnuchin sent a $916bln offer to Pelosi on Tuesday, but she and Senate Minority Leader Chuck Schumer, have rejected it because it does not include supplemental federal unemployment payments.
A Food and Drug Administration panel is scheduled to vote today on whether to recommend the approval of Pfizer and BioNTech’s coronavirus vaccine for emergency use. The decision from the agency’s Vaccines and Related Biological Products Advisory Committee, an outside group of experts in infectious diseases and vaccines, is the last step before the FDA is likely to give the final sign-off to distribute the doses throughout the United States.
In global headlines today, the ECB left rates unchanged, while expanding its monetary stimulus program by another 500 billion euros. The central bank launched its Pandemic Emergency Purchase Programme (PEPP) earlier this year in order to support the economy in the wake of the pandemic. Following today’s expansion, the total asset purchase value is now 1.85 trillion euros, and the ECB extended the horizon for purchases under the PEPP to March 2022. Reinvestments of assets maturing from the PEPP have also been extended until the end of 2023. In a statement following the decision, the ECB said it would conduct net purchases until its Governing Council judges that the “coronavirus crisis phase is over,” while restating that interest rates will remain at their current low levels until the central bank sees the inflation outlook “robustly converge” to its target of “close to, but below” 2%.
Market Analysis
Not much is new in the markets as we work into the last few sessions of the week. The 10yr continues to be locked within the range from ~.83-~.98%, and while yields have not been poised enough to test and cross through the 1% handle yet, they have not been motivated to put in lower marks under our defined range low either. With all of the cross-currents and headwinds affecting markets, it’s a sit and wait period at this point…. What will ultimately come in the form of fiscal relief, and as a result, what does that do to the Fed’s decision next week? In any case, let’s continue to stay on our toes, and keep locking those loans in until we have more clarity.
For Fed operations today, we see a max of $4.932bln, starting with $3.627bln UMBS30 1.5% and 2.0% coupons, followed by $1.305bln UMBS15 1.5% and 2.0% coupons. Later this afternoon, the Fed will report on MBS purchases for the week ending December 9th, which are expected to average $6.6bln per day vs. originator supply of $6.2bln per day. Current levels – 10s trading up 1/32s at ~.936%, MBS down -1/32s in our benchmark UMBS30 2.0 coupon, with stocks down -80 points on the Dow.
Economic Data
The JOLTS report for October showed job openings rose to 6.652mln, up +158k from September. Hires were little changed at 5.8mln, while total separations increased to 5.1mln. Within separations, the quits rate was unchanged at 2.2%, while the layoffs and discharges rate increased to 1.2%. Job openings increased in health care and social assistance, and state and local government education, as openings decreased in a number of industries such as retail trade, accommodation and food services, and finance and insurance. Hires increased in a number of industries over the year, with the largest increases in transportation, warehousing, and utilities and in durable goods manufacturing. Hires decreased in wholesale trade, other services, and federal government. Over the 12 months ending in October, hires totaled 70.4mln and separations totaled 76.1mln, yielding a net employment loss of 5.7mln. These totals include workers who may have been hired and separated more than once during the year. Later today, the Treasury will auction off $38bln in 10yr notes at 12pm CST.
Headlines & Other News
There is no Fedspeak this week, as officials are in their blackout period ahead of next week’s FOMC meeting on December 15-16th.In global central bank news, the ECB is set to expand its massive stimulus program further on Thursday as it deals with a second wave of the coronavirus pandemic and the associated lockdowns. Back in October, the euro zone’s central bank vowed to “recalibrate its instruments” at its December meeting to respond to the “unfolding situation.” Current expectations for tomorrow’s announcement are for an extension of the ECB″s bond-buying program until December 2021, with an extra 600 billion euros in total, alongside a new financing program for banks.
On Tuesday, the Trump administration announced a $916 billion stimulus proposal to House Speaker Nancy Pelosi. Treasury Secretary Steven Mnuchin said in a statement that the plan would be financed with $140 billion in unused funds from the Paycheck Protection Program and $429 billion from the Treasury Department. The proposal includes both state and local aid and liability protections for businesses and schools, which are two provisions holding up bipartisan negotiations. It would also include $600 direct payments to Americans but no additional federal supplemental unemployment benefits. Both House Speaker Pelosi and Senate Minority Leader Chuck Schumer said that Senate Majority Leader Mitch McConnell’s decision to sign off on the package, represented “progress.” However, they also noted that, “the President’s proposal starts by cutting the unemployment insurance proposal being discussed by bipartisan Members of the House and Senate from $180 billion to $40 billion. That is unacceptable.” They added that “the bipartisan talks are the best hope for a bipartisan solution.” Although there remain wide difference between parties, the House is voting today on a 1-week stopgap measure to fund the government through December 18th. The Senate will then vote on the measure later this week so that the President can then sign it into law to prevent a shutdown this Friday.
Market Analysis
Appetite for risk assets is back in swing after seeing the S&P hit a record closing mark in yesterday’s session. This morning, equities are opening in the green once again off of vaccine optimism, and the continued hopes of fiscal stimulus and avoidance of a government shutdown by the end of the week. Treasury yields are back higher around ~.95% on the 10yr vs. yesterday’s closing mark of ~.913%. MBS levels are mostly quiet, down -1/32s in our benchmark coupon, flat across the rest of the stack.
As long-end supply now lines up for today and tomorrow with $62bln in 10s and 30s, it’s no surprise to see yields drifting higher this morning. We continue to trade the range in 10s from ~.83-~.98%, with expectations that a 1% handle will show its face in the week(s) to come. Until we see some more clarity on the items that continue to support equity markets, in addition to just what the Fed might do next week as a result, we can expect the day to day choppy trading patterns to continue. That said, this market can sideswipe us with one headline, so we need to stay on our toes, and keep locking those loans in.
For Fed operations today, we see a max of $8.7bln, including two UMBS30 trades. Kicking things off will be $3.627bln in UMBS30 1.5% and 2.0% coupons, followed by $1.763bln GN2 2.0% and 2.5% coupons, and concluding with $3.31bln UMBS30 2.0% and 2.5% coupons. Since the start of QE back on March 16th, the Fed has purchased $1.38trln in MBS. Current levels – 10s trading down -8/32s at ~.949%, MBS down -1/32s in our benchmark UMBS30 2.0 coupon, with stocks up +20 points on the Dow.
Economic Data
The NFIB Small Business Optimism Index declined -2.6 points, posting at 101.4 for November. Down modestly from the prior month’s read, the index remains well above the 47-year historical average reading of 98. Within the index, 6 of the 10 components declined, while 4 increased. The decline in optimism levels was mostly driven by the fall in expectations in the short-term. The number of owners expecting better business conditions over the next six months declined by -19 points to 8%. "Small business owners are still facing major uncertainties, including the Covid-19 crisis and the upcoming Georgia runoff election, which is shaping how they're viewing future business conditions," said NFIB Chief Economist Bill Dunkelberg. Also declining was inventory investment plans for the next 3 to 6 months, falling by -7.0 points. Earning trends over the past 3 months declined by -4.0 points to a net negative 7% of owners reporting higher earnings. Plans to make capital outlays, expectations of higher sales and the number of owners who think it is a good time to expand also fell, although only by -1.0 point. The components referring to current inventory levels, current job openings and expected credit conditions improved by a marginal +1.0 point. Owners have plans to fill open positions, the report said, with a seasonally adjusted net 21% of those surveyed planning to create new jobs in the next three months, up +3.0 points from October. The NFIB Uncertainty Index decreased eight points to 90, still a historically high reading. Uncertain conditions will continue in the coming months due to the increased spread of Covid-19 cases, the report said. Of owners surveyed, 24% selected the quality of labor as their top business problem, followed by taxes and government regulation, with a 20% and 14%, respectively.
The Labor Department reported this morning that nonfarm productivity, which is a measure of hourly output per worker, increased at a +4.6% annualized rate in Q3. This is a modest downward revision from the +4.9% pace that was estimated last month, and is down from a +10.6% rate in Q2. The economy has recouped roughly two-thirds of output lost during the pandemic, while only about 56% of the 22.2mln jobs lost in March and April. Jumping back into the report for Q3, output increased +43.4%, and hours worked increased by +37.1%, both of which were the largest in the series’ 73yr history. To contrast, Q2’s drop of -36.8% in output and -42.9% decline in hours worked were the largest since recording began back in 1947. In the manufacturing sector, labor productivity increased at a +19.9% annual rate in Q3 of 2020; output increased at a +56.2% annual rate and hours worked increased at a +30.3% annual rate. These increases in the third quarter of 2020 follow the largest decreases in these three measures in the second quarter, when total manufacturing productivity fell -14.0%; output dropped -46.5%, and hours worked fell -37.8%. The sharp increase in factory output in Q3 was mostly in durable goods manufacturing, which was led by motor vehicle production. Nondurable goods manufacturing productivity increased +.7% in Q3, as output increased +22.6% and hours worked increased +21.8%. Unit labor costs in the nonfarm business sector decreased at an annual rate of +6.6% in Q3, including a -2.3% decrease in hourly compensation and +4.6% increase in productivity. The third-quarter decline in unit labor costs followed three consecutive quarterly increases, and nonfarm business unit labor costs increased +4.0% over the last four quarters.
This week’s supply from the Treasury kicks-off today with the auction of $56bln in 3yr notes at 12pm CST.
Headlines & Other News
There is no Fedspeak this week, as officials are in their blackout period ahead of next week’s FOMC meeting on December 15-16th.
The Food and Drug Administration said data from Pfizer’s coronavirus vaccine trials was “consistent” with recommendations put forth by the agency for an emergency use authorization, adding the vaccine did not raise any specific safety concerns. In briefing documents published ahead of an advisory meeting Thursday to review Pfizer’s vaccine, FDA staff also said data submitted appeared to show the vaccine provided protection after the first dose. Pfizer’s vaccine requires two doses about three weeks apart. The FDA is expected to decide on whether to authorize Pfizer’s vaccine within days.
The MBA’s latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance remained unchanged relative to the prior week at 5.54% as of November 29, 2020. According to MBA's estimate, 2.8 million homeowners are in forbearance plans. The share of Fannie Mae and Freddie Mac loans in forbearance decreased slightly to 3.34 percent - a 2-basis-point improvement. Ginnie Mae loans in forbearance increased 6 basis points to 7.89%, and the forbearance share for portfolio loans and private-label securities (PLS) increased by 7 basis points to 8.70%. The percentage of loans in forbearance for independent mortgage bank (IMB) servicers decreased 1 basis point from the previous week to 6.02%, and the percentage of loans in forbearance for depository servicers increased 1 basis point from the previous week to 5.48%. "After two weeks of increases, the share of loans in forbearance was unchanged for the week that included Thanksgiving. A small decline in forbearances for GSE loans was offset by increases for Ginnie Mae and portfolio loans," said Mike Fratantoni, MBA's Senior Vice President and Chief Economist. "While new forbearance requests declined for the week, exits slowed to a new low for the series." Added Fratantoni, "The job market data for November showed an economic recovery that was slowing in response to the latest surge in COVID-19 cases. It is not surprising to see the rate of forbearance exits slow, as households that needed forbearance assistance in October may be in even greater need now."
Market Analysis
Ongoing headlines surrounding global trade and Brexit has helped Treasuries continued their risk-off move into the overnight session with 10s trading within a ~.919% to 0.941% range. This morning, we find levels modestly better at ~.911% as equity markets have rebounded from lower levels at the open. MBS levels are slightly in the red, lagging the move in 10s, but only down -1/32s across the coupon stack.
Looking at the bond market, the upward trend channel that was set back in August remains well in-play for the 10yr, and we stay pinned to the belief that yields will ultimately find their way higher to the psychological 1% handle. Technically, the 10yr trading range continues to hold within ~.83-.98%, as we expect choppy day over day trading sessions to continue. For the week ahead, economic date is on the lighter side, but the bond market will be digesting another heavy amount of Treasury supply, in addition to any new developments from Washington. We still think a defensive bias plays to your advantage as these headlines come and go.
For Fed operations today, we see a max of $6.38bln, including $1.305bln UMBS15 1.5% and 2.0% coupons, followed by $3.311bln UMBS30 2.0% and 2.5% coupons, and concluding with $1.764bln GN2 2.0% and 2.5% coupons. Current levels – 10s trading up +5/32s at ~.911%, MBS down -1/32s in our benchmark UMBS30 2.0 coupon, with stocks up +40 points on the Dow.
Economic Data
The Conference Board’s Employment Trend index grew at a much
slower pace for the month of November, up +.5% from a revised print of +1.7% in
October. The year over year rate improved modestly from -10.4%, to now -10.2%.
Within the report today, 6 out of 8 components showed a positive contribution.
Those included Initial Claims for Unemployment Insurance; the Number of
Employees Hired by the Temporary-Help Industry; Industrial Production;
Percentage of Firms With Positions Not Able to Fill Right Now; Percentage of
Respondents Who Say They Find “Jobs Hard to Get”; and Job Openings. The
non-positive contributions came from Ratio of Involuntarily Part-time to All
Part-time Workers and Real Manufacturing and Trade Sales, the latter being
statistically imputed for the last two months.
Later today at 2pm CST, we will see the release of Consumer
Credit for October, which is expected to increase by $17bln vs. the prior
$16.21bln back in September.
While
today is short of top tier releases, the remainder of calendar this week lines
up with some more important figures, especially with inflation data on Thursday
and Friday. Tomorrow, we see Final Q3 productivity/unit labor costs, followed
by the JOLTS (Oct) and Wholesale Trade (Oct) Wednesday, Thursday brings CPI
(Nov) and the Treasury Statement (Nov), and we round out on Friday with PPI
(Nov) and Consumer Sentiment (pre-lim Dec). We will also see another massive
amount of supply from the Treasury in the form of $118bln of 3s, 10s, and 30s
over the next 3 days. Things kick-off tomorrow with the auction of $56bln in
3yr notes.
Headlines &
Other News
There is no Fedspeak this week, as officials are in their
blackout period ahead of next week’s FOMC meeting on December 15-16th.
The FDA will meet this Thursday to determine if it will
grant emergency use authorization for the Pfizer/BioNTech vaccine.
Also of focus this week, Congress has until Friday to fund
the government. Expectations are that some form of COVID-19 stimulus will also
be attached to the extension, but details of just how much and what is included
is still up for debate. The most recent headlines are reporting that the
details of the $908bln stimulus proposed last week by a bipartisan group of lawmakers
will be released later today. It’s been reported that the initial details
indicate that the proposal included: $160bln for state and local governments,
liability protections for businesses, $288bln for small businesses, $82bln for
schools, $25bln in rental assistance, $180bln to support extending expanded
unemployment through March including a $300 weekly federal supplement, and
$17bln for the airline industry.
Market Analysis
Tensions between the U.S. and China are climbing higher following the reports around possible new sanctions against Chinese officials. Tack on further concerns that the UK and EU will not reach a trade deal by month-end, and headlines around the potential for a winter Covid-19 surge, and we see equity markets taking a breather after hitting all-time highs late last week. In turn, we see a risk-off trade today with Treasuries rallying across the curve. After Friday’s closing mark of ~.969% on the 10yr, we are seeing some relief back down to ~.938% in the early session. MBS levels are trying to keep pace, but are only up +5/32s in our benchmark, with the rest of the coupon stack up +1/32s.
Although stocks are seeing a little red to start the week,
it’s no doubt that equity markets remain supported on expectations that the
economy will soon start to recover faster as vaccine efforts are released. In
addition, expectations that Congress will finally agree on some form of
stimulus is keeping valuations higher. Looking at the bond market, the upward
trend channel that was set back in August remains well in-play for the 10yr,
and we stay pinned to the belief that yields will ultimately find their way
higher to the psychological 1% handle. Technically, the 10yr trading range
continues to hold within ~.83-.98%, as we expect choppy day over day trading
sessions to continue. For the week ahead, economic date is on the lighter side,
but the bond market will be digesting another heavy amount of Treasury supply,
in addition to any new developments from Washington. We still think a defensive
bias plays to your advantage as these headlines come and go.
For Fed operations today, we see a max of $6.697bln,
including $1.305bln UMBS15 1.5% and 2.0% coupons, followed by $3.628bln UMBS30
1.5% and 2.0% coupons, and concluding with $1.764bln GN2 2.0% and 2.5% coupons.
This week, the Fed is scheduled to buy a max of $32.099bln, which equates to
$6.4bln per day on average. Last week, they bought $35.141bln, which equated to
$7.0bln per day average vs. originator supply of $7.4bln per day.
Current levels – 10s trading up +10/32s at ~.938%, MBS up +5/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -130 points on the Dow.
Economic Data
Nonfarm Payrolls for November posted weaker than expected,
rising only +245k on headline, with private payrolls up only +344k. We also see
revisions over the prior 2 months, with September up another +39k to +711k, but
October down -28k to 610k. Back to the report for November, we see
goods-producing jobs up +55k, with construction up +27k, and manufacturing up
+27k. Service-producing jobs rose +190k for the month, including gains in
transportation and warehousing of +145k, professional and business services up
+60k, education and health up +54k, and leisure and hospitality up +31k. The
unemployment rate fell -.2 percentage points to 6.7%, and is down by -8.0
percentage points from its high in April, but is still 3.2 percentage points
higher than February. The number of unemployed persons, now at 10.7mln is still
4.9mln higher than in February as well. While the unemployment rate met
expectations, it fell along with a drop in the labor force participation rate
to 61.5% from a prior 61.7%. Within the household survey, the -.2 percentage
point drop in participation translated to 400k leaving the labor force. The
-74k drop in that survey's employment measure pulled the employment-population
ratio back to 57.3%. The number not in the labor force who currently want a job
bounced back 448k, to 7.136mln, although that's still lower than September's
7.227mln. Average hourly earnings were a bright spot, up +.3% on the month,
which held the year over year growth rate at +4.4%. Finally, the workweek hours
remained steady at 34.8hrs. Overall, a weak report and suggest that as Covid-19
cases have surged, hiring has slowed. Worker availability seems to also be of
some concern, and a significant factor, as there are many persons that are
unable to work due to pandemic related issues.
Next
week’s data calendar will kick off with Consumer Credit (Oct) and Employment
Trends Index (Nov) on Monday, Final Q3 productivity/unit labor costs on
Tuesday, followed by the JOLTS (Oct) and Wholesale Trade (Oct) Wednesday,
Thursday brings CPI (Nov) and the Treasury Statement (Nov), and we round out
the week on Friday with PPI (Nov) and Consumer Sentiment (pre-lim Dec).
Headlines &
Other News
Fedspeak
winds down today as members head into their blackout period ahead of the
December 15-16th FOMC meeting. For today’s sessions, Chicago
President Evans is participating in a moderated Q&A session on current
economic conditions and monetary policy before the Michigan Bankers Association
this morning. Following Evans will be Board Governor Bowman who is speaking on
“Community Banking and FinTech” before the Independent Community Bankers of
America ThinkTECH Policy Summit. Last up will be Minneapolis’ Kashkari who will
participate in a moderated Q&A related to the regional economy of southeast
Minnesota.
House Speaker Nancy Pelosi and
Senate Majority Leader Mitch
McConnell spoke Thursday for the first time since at least the
2020 election as Congress continues to work towards a coronavirus stimulus deal
and prevent a government shutdown after Dec 11th. McConnell said
yesterday that he has seen “hopeful signs” for striking a stimulus deal before
the end of the year. Among other implications if Congress fails to get
something accomplished, about 12mln people could lose unemployment benefits
after Christmas. “Compromise is within reach. We know where we agree. We can do
this,” McConnel said on the Senate floor. It’s still questionable if Democrats,
who lead the House and can hold up any bill in the Senate, will accept
McConnell’s vision of compromise, which equates to about half of what they are
asking for.
Market Analysis
The Employment report for November showed some disappointing
job gains, but market reaction was not how we normally would expect things to
play out. Seems like stocks have taken the news with a grain of salt, with the
sentiment that the slower the pace of job gains, brings the need for bigger
fiscal stimulus, and the current price action today reflects that. With the
report today, it gives further backdrop for the need of a higher relief package
from Congress. Looking at the markets in early trading, equity markets are
opening up around +.5%, while we see 10s steepening to ~.974% vs. yesterday’s
closing mark of ~.921%. MBS levels are down -5/32s in our benchmark coupon,
with the rest of the coupon stack off around -2/32s.
The upward trend channel that was set back in August remains
well in-play, and we stay pinned to the belief that 10yr yields will ultimately
find their way higher to the psychological 1% handle, and possibly higher. The
10yr yield is back over ~.95%, and has hit a new high for the week of ~.974%.
Technically, the 10yr range continues to hold within ~.83-.98% for the time
being, but we are back at the brink of a break above that range. We expect
choppy day over day trading sessions to continue, and with any cross through the
November high at ~.975, we need to buckle up. Defense is our bias, lock your
loans.
For Fed operations today, we see a max of $4.935bln,
including $1.307bln UMBS15 1.5% and 2.0% coupons, followed by $3.628bln UMBS30
1.5% and 2.0% coupons. Looking ahead to next week, the Fed is scheduled to
average $6.4bln per day vs. recent originator supply of $7.1bln per day.
Current levels – 10s trading down -19/32s at ~.974%, MBS down -5/32s in our
benchmark UMBS30 2.0 coupon, with stocks up +110 points on the Dow.
Economic Data
Initial
jobless claims for the week ended November 28th fell by -75k to
712k. Claims for the week ending November 21st were upwardly revised
by +9k to 787k (orig. 778k). Prior to this week, jobless claims increased for
two consecutive weeks for the first time since back in July. While this week’s
data is encouraging, claims data for any holiday week this time of year has
been difficult to confirm, so it is likely we will see a revision come next
week as well. Continuing claims, which lag a week, fell -569k to 5.52mln from a
prior 6.089mln. Continuing claims have fallen in each week but 2 of them since
July 18th, and since that time, they have dropped by -11.431mln. We
saw continuing claims finally start to spike downwardly in September, which is
roughly 6 months since the beginning of the pandemic.
The Markit Services PMI headline rose by +.7 to 58.4, which
is +1.5 points higher vs. October, and now the highest print since March 2015.
Within the report, new business growth index was revised higher from 56.4 to
57.56, the highest since April 2018, as the backlogs of work index rose +.81 to
52.01. As a result, the future expectations index was revised higher by +1.66
to 79.36, its highest since January 2014. Price increases were also revised
higher, as output prices rose +.77 to 59.67, and input prices were up +.12 to
63.65, both record highs. The downside miss was in the employment index, which
was revised down -.79 to 57.79, but is still above the October final read of
53.40. Markit credited the month's gains to reduced political uncertainty,
hopes for greater stimulus, and encouraging news on vaccines. “The recent
improvement in demand and the brightening outlook encouraged firms to take on
extra staff at a rate not previously seen since the survey began in 2009,
underscoring how increased optimism is fueling investment and expansion.
Pricing power is also being regained, with firms pushing up average charges for
goods and services at a rate not seen for at least a decade, boding well for
stronger profits growth.”
The ISM Non-Manufacturing Services PMI posted at 55.9 in
November, slightly down from October’s 56.6 print. Of the 18 surveyed
industries, 14 reported expansion and 4 saw contraction. Comments were largely
focused on COVID-19, noting supply chain difficulties due to re-closings,
conflicting guidelines/requirements at different levels of government,
shortages of PPE, and also changes in operations. Within the report, the new
orders index fell to 57.2 from 58.8, while business activity fell to 58.0 from
61.2. The employment index saw an increase, up to 51.5 from a prior 50.1,
holding the rise over the 50 mark from September. Overall, while there is
concern that these levels can be sustained in the months ahead, the headline
read is still strongly over the 50 mark which signals expansion.
Headlines &
Other News
There are no Fed officials scheduled to speak during today’s session.
House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer are
continuing to urge Senate Majority Leader Mitch McConnell to use a $908bln
bipartisan stimulus plan as the basis for relief discussions. “While we made a
new offer to Leader McConnell and Leader McCarthy on Monday, in the spirit of
compromise we believe the bipartisan framework introduced by Senators yesterday
should be used as the basis for immediate bipartisan, bicameral negotiations,”
Schumer and Pelosi said. McConnel quickly shot down the bipartisan plan after
it’s release on Tuesday, as he has only endorsed about $500bln ins pending for
a new relief package. McConnell also signaled that he wants to tie aid to a
government funding bill that Congress needs to pass by Dec. 11th to
avoid a government shutdown.
Market Analysis
As we work through the morning session here today, stocks
are seeing their rally continue, up another .5% on the Dow as jobless claims
hit some new pandemic lows. In bonds, we find 10s back around ~.933% vs. yesterday’s
closing mark at ~.946%, while MBS levels are quiet, flat to down -1/32s across
the coupon stack.
The upward trend channel that was set back in August remains
well in-play, and we stay pinned to the belief that 10yr yields will ultimately
find their way higher to the psychological 1% handle, and possibly higher. Now,
that trade could take more time to play out, and with that, MBS should continue
to outperform. At some point, yes, MBS levels will catch up the moves in the
10yr, but for now, the market is still giving us opportunity to take advantage
of that outperformance. It’s a no brainer, lock your loans folks. Technically,
the 10yr range seems to sit within ~.83-.98%, with choppy day over day trading
sessions bound to continue. Any cross through the November high at ~.975 needs
to be approached with more caution.
For Fed operations today, we see a max of $6.382bln,
including $1.307bln UMBS15 1.5% and 2.0% coupons, followed by $3.311bln UMBS30
2.0% and 2.5% coupons, concluding with $1.764bln of GN2 2.0% and 2.5% coupons.
Later this afternoon, the Fed will report on MBS purchases for the week ending
December 2nd, which are estimated at an average of $5.96bln per day
vs. $7.1bln in originator supply.
Economic Data
The MBA weekly mortgage applications index fell by -.6% for the week ending November 27th. Purchase applications rose by +9% from the prior week, and are +28% higher than the same week last year. Refinance applications fell by -5% over the prior week, but are still +102% higher than the same week a year ago. "After adjusting for the Thanksgiving holiday, mortgage applications were mixed, with a jump in purchase applications and a decline in refinances. Purchase activity continued to show impressive year-over-year gains, with both the conventional and government segments of the market posting another week of growth," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "Purchase loan amounts continue to be significantly higher than their average over the past decade and hit $375,000 last week, the largest since the inception of MBA's survey in 1990. Housing demand remains strong, and despite extremely tight inventory and rising prices, home sales are running at their strongest pace in over a decade." Added Kan, "The sustained period of low mortgage rates continues to spark borrower demand, and the mortgage industry is poised for its strongest year in originations since 2003. The ongoing refinance wave has been beneficial to homeowners looking to lower their monthly payments during these challenging economic times brought forth by the pandemic."
Private payrolls in the November ADP Employment Report only showed gains of +307k, below market expectations of +410k. The print for November also comes in below the upwardly revised number of +404k for October (orig. +365k), and is the smallest gain since July’s +216k result. Most of the hiring in the ADP report came from firms with 50 to 499 workers, which added +139k jobs. Small companies added +110k, while big business only added +58k. Service industries provided the bulk, adding +276k jobs, while leisure and hospitality added +95k workers, despite increasing restrictions placed on bars and restaurants as coronavirus cases continue to increase. Education and health services were also in the mix, up +69k mostly on the health care side, while professional and business services increased +55k, with construction up +22k, and manufacturing up +8k. Given all that, we know that ADP’s prints are never on point, mostly underestimated at best. For Friday’s BLS Report, headline jobs are expected to be +440k, down from the +638k in October, private payrolls are estimated at +590k, and the unemployment rate is expected to drop from 6.9% to 6.7%.
Later today at 1pm CST, the Federal Reserve will release its Beige Book in preparation for the December 15-16th FOMC meeting.
Headlines & Other News
Fedspeak is heavy again today starting with Vice Chair for Supervision Quarles who is participating in a “Financial Regulation” discussion before the virtual Financial Times Global Banking Summit. New York Fed President Williams gives opening and closing remarks before the virtual NY Fed Webinar Series on Culture; Session 2: Trust and Decision-Making”. Next in line, Chair Powell, along with Treasury Secretary Mnuchin, will repeat their testimony on the Quarterly CARES Act Report to Congress to the House Financial Services Committee. At the same time, Philadelphia Fed President Harker will speak on the economic outlook and participate in an interview before the virtual CIO Leaders in Alternative Investments Summit. Last up, New York’s Williams is back in swing to give opening remarks before a virtual Press Briefing on the Economic Impacts of Covid-19 on the Second District.
The MBA’s latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance increased from 5.48% of servicers' portfolio volume in the prior week to 5.54% as of November 22, 2020. According to MBA's estimate, 2.8 million homeowners are in forbearance plans. The share of Fannie Mae and Freddie Mac loans in forbearance increased for the first time in 25 weeks to 3.36% - a 1-basis-point increase. Ginnie Mae loans in forbearance increased 10 basis points to 7.83%, and the forbearance share for portfolio loans and private-label securities (PLS) increased by 15 basis points to 8.63%. The percentage of loans in forbearance for independent mortgage bank (IMB) servicers increased 9 basis points from the previous week to 6.03%, and the percentage of loans in forbearance for depository servicers increased 3 basis points to 5.47%. "For the second week in a row, the share of loans in forbearance has increased, driven by a rise in new forbearance requests and another slowdown in the pace of forbearance exits. The increase was across all loan and servicer types. Even GSE loans, which had previously declined for 24 straight weeks, saw an increase last week," said Mike Fratantoni, MBA's Senior Vice President and Chief Economist. "Additionally concerning, there was an increase in forbearance re-entries, as borrowers who had previously exited sought relief again. The increase in new forbearance requests may be the result of additional outreach to homeowners who had previously not taken advantage of forbearance opportunities. However, the slowing rate of exits to a new survey low further highlights that borrowers still in forbearance are increasingly challenged by the renewed restrictions on economic activity to contain the surge in COVID-19 cases." Added Fratantoni, "Recent housing market data remain quite strong and we expect that the market is well positioned for additional growth next year, but these data show that additional support is likely needed to get through this winter."
Market Analysis
Treasury yields are continuing their climb higher on the longer-end of the curve, specifically with the 10yr trading at ~.95% vs. yesterday’s ~.934% closing mark. Today is the first day we’ve seen yields over ~.95% since we hit ~.964% on November 12th, and the ~.975% high on November 9th, which were also the highest yields we saw since March. From a technical perspective, it looks as if 10s are poised to re-test these high marks, and possibly make a break-through in the week(s) ahead. That said, MBS levels are continuing their outperformance vs. their Treasury counterparts, trading flat across the coupon stack.
While the technicals still play a big part in the current environment for yields, it’s no doubt that the day over day moves also remain heavily headline driven, mostly centered around stimulus talks and vaccine news over the past few sessions. Sentiment amongst equity markets are positive, based off the belief now that Congress will get some form of bipartisan deal done before their recess, combined with hopes of further stimulus measures come January. This, of course, has added further pressure to bonds, and puts 10s pointed even closer to the high yield levels mentioned above, and possibly the psychological level at 1%. Best bet for us is to keep defense on the field and get your loans locked.
For Fed operations today, we see a max of $8.705bln, including a $3.629bln UMBS30 1.5% and 2.0% coupons, followed by a $1.765bln of GN2 2.0% and 2.5% coupons, and concluding with $3.311bln UMBS30 2.0% and 2.5% coupons.
Current levels – 10s trading down -7/32s at ~.953%, MBS flat in our benchmark UMBS30 2.0 coupon, with stocks down -65 points on the Dow.
~Cheers
Tuesday, December 1, 2020
Economic Data
The ISM Manufacturing PMI for November fell by -1.8 points
to 57.5, slightly worse than market expectations of 58.0. While still a very
strong reading overall, the ISM noted that, “labor market difficulties, both
current and anticipated, at panelists’ companies and their supplies will
continue to dampen the manufacturing economy until the coronavirus crisis
ends.” Within the data, new orders fell -2.8 points to 65.1, production fell
-2.2 points to 60.8, and employment fell -4.8 points to 48.4. Supplier
deliveries were up +1.2 points to 61.7, while inventories fell -.7 points to
51.2. On the trade sector, exports rose +2.1 points to 57.8, while imports fell
-3.0 points to 55.1. As orders continued to rise more swiftly than production,
the backlogs index rose +1.2 to 56.9, it’s highest since August 2018. Customer
inventories fell -.4 points to 36.3, while the prices index ticked down -.1 to
65.4.
Construction spending rose +1.3% in October, boosted by
solid gains in investment in both private and public sector projects. Data for
September was revised downwardly, however, to show spending falling by -.5% vs.
the initially reported increase of +.3%. Back to the data for October, spending
for private construction projects rose by +1.4% overall, driven by investment
in homebuilding as spending on residential construction rose +2.9%. In
contrast, driven by lower oil and gas prices, nonresidential construction
spending actually fell -.7% for the month. Spending on public construction
projects increased by +1.0%.
Looking ahead to the rest of the week, tomorrow brings the
ADP Employment Report (Nov), followed by the Fed’s Beige Book later in the
afternoon. On Thursday, we will see weekly Jobless Claims and ISM
Non-Manufacturing (Nov), while Friday concludes with the Nonfarm Payroll report
(Nov), Trade Balance (Oct), and Factory Orders (Oct).
Headlines &
Other News
Federal Reserve Chair Powell and Treasury Secretary Mnuchin
are speaking before Congress this week. In prepared remarks for his testimony
this morning in front of the Senate Banking Committee on the Quarterly CARES
Act Report to Congress, Powell cautioned that, “The rise in new COVID-19 cases,
both here and abroad, is concerning and could prove challenging for the next
few months. A full economic recovery is unlikely until people are confident
that it is safe to reengage in a broad range of activities.” He also noted that
“It remains difficult to assess the timing and scope of the economic
implications of these developments with any degree of confidence.” Powell
emphasized the important of the lending programs that the Fed has deployed
during the pandemic, noting that they have been integral in keeping the
economic fallout from being worse. Mnuchin, who will also appear twice this
week on the Hill, has said that the legislation that enabled the programs does
not permit them to run past December 31st. He has noted that the
$455bln in funding used for these programs would be better used for other
purposes. “Based on recent economic data, I continue to believe that a targeted
fiscal package is the most appropriate federal response. I strongly encourage
Congress to use the $455 billion in unused funds from the CARES Act to pass an
additional bill with bipartisan support,” Mnuchin said. “The Administration is
standing ready to support Congress in this effort to help American workers and
small businesses that continue to struggle with the impact of COVID-19.” In
turn, Fed Powell is expected to advocate for the reinstatement of these
programs when he testifies before Senate and House committees over the next two
days.
On the Fedspeak front, in addition to Powell, there are three other
officials appearing at various virtual events today. Board Governor Brainard
will be participating in a “Community Reinvestment Act Modernization”
discussion hosted by the Chicago Community Trust. Next up, San Francisco Fed
President Daly will speak before an Economic Forecast Luncheon hosted by
Arizona State University. Last up is Chicago Fed President Evans who will
appear at two different functions: “Visions for Milwaukee’s Future: A Community
Forum” where he will give real time opening remarks and on CNN International
via a pre-taped television interview.
Market Analysis
As we kick-off the final month of 2020…. Sigh… we once again
see Treasury yields in a bear-steepening pattern and a heavier rally in equity
markets. The 10yr has found its way back up to ~.91% in early trading this
morning vs. yesterday’s closing mark of ~.842%. MBS levels are outperforming,
but still down -10/32s in our benchmark 2 coupon. Stocks are getting the jump
on things today, currently up over 1.25% on most indices.
Although we’ve seen a resurgence in Covid-19 cases on a
global scale, it's no doubt that the positive vaccine news has continued to
support equity markets, further boosting sentiment amongst investors and
valuations. So what about bonds? Well, yes, we continue to see an upward
trending pattern in yields, one that began back in August and has continued to
take shape since. While it looks as if 10yr levels could pass-through the 1%
handle in the month(s) ahead, there is still a wide spread between yields and
MBS. What this means is that it’s likely going to still take some time for MBS
levels to catch up and follow pace in the event of a heavier sell-off in
Treasuries. Given that, we can’t get too worried about what’s on the screens on
days like today, as the fact is, MBS levels and interest rates are still well
priced, and that should prompt you to still hit the lock button.
For Fed operations today, we see a max of $6.701bln,
including a $1.307bln UMBS15 1.5% and 2.0% coupons, followed by a $3.629bln
UMBS30 1.5% and 2.0% coupons, and concluding with a $1.765bln of GN2 2.0% and
2.5% coupons. In the previous 2-week time frame that ended yesterday, the Fed
bought roughly $6.5bln per day on average, as expected, for a total of
$65.364bln. The new 2-week period kicked off yesterday and is expected to top
$58.821bln ending December 11th. Since the start of QE on March 16th,
the Fed has bought $1.337trln in MBS.
Current levels – 10s trading down -21/32s at ~.911%, MBS down -10/32s in our
benchmark UMBS30 2.0 coupon, with stocks up +350 points on the Dow.
Economic Data
Chicago PMI came in at 58.2 for November, slightly missing
survey expectations of 59.0. While this reading is a three month low, it is
still elevated compared to historical norms. New Orders fell for the first
since May, with them being doing 5.0 points, which is a three-month low. The
Prices index did jump up 9.8 points reaching a 2-year high, while the Supplier
Deliveries rose 4.9 points, its highest reading since May.
Pending Home Sales came in down 1.1% for the month October,
missing survey expectations of +1.0% month over month. Still, year over year
Pending home Sales is up 20.2%, showing demand is strong. The Northeast was
down 5.9% m/m, the Midwest was -0.7% m/m, the South was +0.1% m/m, and the West
was flat, 0.0%. While the report was not as strong as the market was expecting
, demand appears to still be strong.
Headlines &
Other News
Tuesday and Wednesday Treasury Secretary Mnuchin and Fed
Chairman Powell will testify on the Cares Act to Congress. The markets will be
looking for Chairman Powell to give some insight into the current thinking of
monetary policymakers, especially a chance to confirm or push back on the
markets thinking that the Fed will change their weighting of bond purchases to
the longer end of the curve, such as 10s, 20s, 30s. If the Fed holds off on WAM
extension, I would expect the markets to be disappointed and lead to risk off
sentiment. I’m not sure if we will get much insight into the WAM extension this
Tuesday or Wednesday, or if we will have to wait until the Fed meeting later
this month. Chairman Powell has made every effort to keep financial conditions
as easy as possible so I would be surprised if we did not see a WAM extension
in their meeting later this month.
Market Analysis
Today is the end of November, crazy it is about to be
December. Bond markets are rallying today, with today being a risk-off day with
stocks in the red, although treasuries have been in the red most of the morning
and just now turned green on the screen. Mortgage backs are out-performing the 10
year, though, with the UM30 2’s and 2.5’s up 6+/32 and 3+/32, while the 10 year
is up only 1+/32. For the time being it looks like we are in a 0.82%-0.97%
trading range on the 10 year. I would still be defensive here, best to take any
price improvements you see.
Currently the 10 year is at 0.839%, UM30 2’s in Jan are at
+6.5/32, the Dow is down 392 points (-1.31%), S&P is down 28.62 points
(-0.79%) and NASDAQ is down 39 points (-0.32%).
Have a great week!
Economic Data
The weekly MBA mortgage application index increased by +3.9% for the week ending November 20th. Purchase applications rose +4%, and are up +19% over the same week last year. Refinance applications were up by +5%, and are up +79% vs. the same week a year ago. “Weekly mortgage rate volatility has emerged again, as markets respond to fiscal policy uncertainty and a resurgence in COVID-19 cases around the country. The decline in rates ignited borrower interest, with applications for both home purchases and refinances increasing on a weekly and annual basis," said Joel Kan, MBA's Associate Vice President of Industry and Economic Forecasting. "The ongoing refinance wave has continued into November. Both the refinance index and the share of refinance applications were at their highest levels since April, as another week of lower rates drew more conventional loan borrowers into the market." Added Kan, "Amidst strong competition for a limited supply of homes for sale, as well as rapidly increasing home prices, purchase applications increased for both conventional and government borrowers. Furthermore, purchase activity has surpassed year-ago levels for over six months."
Initial Jobless Claims for the week ending November 21st rose by +30k to 778k from the prior week’s upwardly revised print of 748k (orig. 742k). This is the first instance of consecutive weekly increases in claims since the week of July 25th. Continuing claims, which lag a week, fell 299K to 6.071mln from 6.370mln, making another new pandemic-era low. Continuing claims have now fallen in each week except for 2 since July 18th. Since that time, they have fallen a total of 10.880mln. However, the 299K decline this week is the smallest since September 12th, and its expected that weekly declines will continue to come in smaller and smaller on continuing claims, as Covid-19 related factors start to work in as they look to have already done on the headlines reads.
According to the second estimate released by the Bureau of Economic Analysis, Real GDP increased at an annual rate of 33.1% in Q3, unrevised from the initial advance estimate. If we remember, final real GDP contracted in Q2 by -31.4%. From the report, the increase in real GDP reflected increases in PCE, private inventory investment, exports, non-residential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The increase in PCE reflected increases in services (led by health care as well as food services and accommodations) and goods (led by clothing and footwear as well as motor vehicles and parts). The increase in private inventory investment primarily reflected an increase in retail trade (led by motor vehicle dealers). The increase in exports primarily reflected an increase in goods (led by automotive vehicles, engines, and parts as well as capital goods). The increase in nonresidential fixed investment primarily reflected an increase in equipment (led by transportation equipment). The increase in residential fixed investment primarily reflected an increase in brokers’ commissions and other ownership transfer costs.
Durable goods orders rose by +1.3% in October after an upwardly revised +2.1% monthly gain in September. The October gain was entirely driven by non-transportation orders, which increased by +1.3% as well. Tech products drove some strength, particularly communications equipment orders which rose +8.3%. Industrial products posted a net gain, with strength in fabricated metals was partly offset by weakness in machinery orders. Transportation was basically a wash as improving aircraft orders, both defense and nondefense, were offset by weakness in motor vehicle orders. Looking at an annualized basis, core capex orders were up +32.3% in October, and shipments were up +27%, suggesting that equipment spending is still on track to make a solid positive contribution to Q4 GDP growth.
The U.S. advanced trade deficit widened to $80.3bln in October from the prior $79.4bln back in September. Exports of goods for October were $126bln, up $3.4bln more than September exports, while imports of goods were $206.3bln, up $4.4bln over September imports. Imports of consumer goods climbed +6.6% to $65bln, the second-highest reading on record. The report today also showed retail inventories climbed +.8% from September, a fourth straight month of gains, with wholesale inventories advancing by +.9%. Both exports and imports have improved since the crisis first hit, but inward-bound shipments are still below pre-pandemic levels.
Personal Income for October fell by -.7%, while personal consumption increased by +.5%. The decrease in income was more than accounted for by a decrease in government social benefits. Offsetting the decrease in government social benefits were increases in compensation and proprietors’ income (led by farm). Within compensation, an increase in private wages and salaries was partly offset by a decrease in government wages and salaries, which decreased $8.4bln in October, following a decrease of $8.2bln in September and an increase of $22.8bln in August. The $63.5bln increase in real PCE in October reflected increases of $12.7bln in spending for goods and $48.7bln in spending for services. The leading contributor to the increase in spending for goods was recreational goods and vehicles (led by information processing equipment). The leading contributor to the increase in spending for services were spending for health care (led by hospitals).
Headlines &
Other News
Later today around 1pm CST, the FOMC will release its Minutes from the November 4-5th Meeting. Investors will be watching closely for any possible insights as to what the Fed is currently thinking about its bond buying program. Some market goers expect the Fed to possibly make changes at their December meeting, changes that would see the Fed focusing on buying more longer-dated maturities such as 10yr to 30yr bonds in order to keep interest rates lower. As of late, however, the chances of the Committee making any changes have some-what diminished after seeing the expected nomination of Janet Yellen as Treasury Secretary. With Yellen being an advocate for more fiscal stimulus, as well as a ‘friend to the Fed’, this might give the Committee a chance to hold off, and see what plays out with the new administration first. Overall, we expect to see some language today around the discussion of asset buying, but that’s about the extent of it.
Market Analysis
Equity markets rallied once again in yesterday’s session, as the Dow crossed over 30k for the first time in history. Also worth mentioning, the S&P set a record high as well at 3,635, up +1.6%, with the Nasdaq hitting it’s second-highest ever closing mark at 12,037, up +1.3%. As we work through the pre-turkey time hours this morning, those markets are off modestly by -.25 to -.5%. On the bond side, we see a slight improvement in yields, with the 10yr hovering around the ~.86% mark vs. yesterday’s close around ~.88%. MBS levels opened flat across the stack, but have since then improved by +3/32s in most coupons.
Looking ahead, we have Thursday’s holiday market close, followed by Friday’s half-day trading session. With that, expectations aren’t for any range-breaking trades, and thus, we will have to wait for the week ahead to potentially give us any more inclination as to where rates are headed. As we’ve noted, given the positive outlook for vaccine treatments, and most likely some higher fiscal stimulus on deck from the new administration, equity markets will be supported, while it looks more like the 10yr feels comfortable sitting within the range from ~.85-.97% for the week(s) ahead. We continue to think a defensive strategy is still best suited in the current outlook. With today’s modest improvement, use it to your advantage with a few more locks.
For Fed operations today, we see two that total a max of $5.467bln, including a $3.506bln UMBS30 2.0% and 2.5% coupons, and concluding with a $1.961bln of GN2 2.0% and 2.5% coupons. Today will be the Fed’s final operation for the week due to the holiday.
Current levels – 10s trading up +6.5/32s at ~.864%, MBS up +3/32s in our
benchmark UMBS30 2.0 coupon, with stocks down -130 points on the Dow.
Provided by;
Deanne M Powell |NMLS#231841 |PrimeLending Reno
Tuesday, November 24, 2020
Economic Data
According to the S&P CoreLogic Case-Shiller U.S. National Home Price
Index, values rose by +7% in September on an annual basis, up from the +5.8%
increase back in August. This is now the largest gain since September 2014, and
prices are roughly +23% higher than their last peak back in 2006. The 10-city
composite index was up +6.2% year over year, up from +4.9% in the prior month.
The 20-city composite posted a +6.6% annual increase, up from a prior
+5.3%. Phoenix, Seattle and San Diego continued to see the highest annual gains
among the 19 cities (excluding Detroit) in September. Home prices in Phoenix
rose +11.4% year over year, followed by Seattle with a +10.1% increase, and San
Diego with a +9.5% increase. Dallas and New York saw the smallest annual gains,
but were still up in the +4% range compared with September 2019. All 19 cities
reported higher price increases in the year ended September 2020 versus the
year ended August 2020.
The Philly Fed’s Non-manufacturing Business Outlook Survey
fell by -20.0 points in November to +4.2, now the weakest reading since May.
This compares to the recent Philly manufacturing sector report that remained
stronger at +26.3. Within the service sector report today, the new orders index
fell by -8.5 points to -3.7, and the sales/revenue index fell -14.7 points to
-.5. Employment data was mostly unchanged, only dropping by -1.8 points to
+13.9, with the part-time index up +3.7 to +5.6, while the workweek fell -5.6
to +15.3, and the wages and benefits index rose +.2 to +10.6. Most forward
looking numbers were weaker, which suggests that Covid-19 cases rising with no
government support will start to have more effects consumer demand and services
would falter.
The Consumer Confidence index fell to 96.1 in November from an upwardly revised
106.2 in October. The headline print today came in below the market consensus
of 98.0. Within the details, the decline was entirely concentrated in the
expectations index, which fell sharply to 89.5 from 98.2, the lowest since
August. The present situation index, however, held steady at a stronger level
of 105.9. This would have been an increase on the month, had the October data
not been revised up from 104.6 to 106.2. Looking within the report, responses
regarding the labor market continued to show improvement since the Summer
months. In November, 26.7% of consumers said that jobs were "plentiful”,
which is the same as the upwardly revised reading from October. Those responses
saying jobs were "hard to get" fell to 19.5% from a downwardly
revised 19.6%.
Headlines &
Other News
There are three Fed officials participating in virtual events today. Kicking
things off will be St. Louis President Bullard, along with ECB Board Member
Schnable, discussing new challenges from the Covid-19 pandemic to monetary
policy strategies at a Bank of Finland webinar with Bullard speaking on the
U.S. economy and monetary policy. Next up will be New York President Williams
who is participating in a moderated discussion before WSJ Newsmakers Live.
Finally, Vice Chair Clarida discusses “The Federal Reserve’s New Framework” in
a panel before the International Monetary Fund Conference on New Policy
Frameworks for a “Lower-for-Longer” World.
Market Analysis
As recent headlines around positive efforts on the vaccine
front continue to support the ‘risk-on’ move in equities, Treasuries are
continuing to steepen across the curve. Global equities were also further
supported after President Trump has indicated a willingness to begin the
transition process with Biden. Speaking of, President-elect Biden has also been
busy with his selection process for numerous position within his new
administration, one specifically being former Fed Chair Janet Yellen for
Secretary of Treasury as of yesterday. Following the news and into today’s
session, it seems as if yields are not all that thrilled as Yellen is in favor
of more fiscal spending to support the economy.
In trading this morning, 10s are back up around ~.88% vs.
yesterday’s closing mark of ~.859%. MBS levels are outperforming, only down
-1/32s across the coupons tack. As noted, we saw a minor break last week below
our resistance level of ~.85%, however, we were unable to put in stronger,
consecutive closing marks beneath that handle to possibly shift the overall
uptrend in yields. With another day above that mark now in the books, it looks
more like 10s feel comfortable sitting within the micro-range from ~.85-.97%
for now, and we think that sets the goal posts for the week(s) ahead. We
continue to think a defensive strategy is still best suited in the current
outlook.
For Fed operations today, we see three that total a max of
$8.429bln, including a $3.679bln UMBS30 1.5% and 2.0% coupons, followed by a
$1.244bln UMBS15 1.5% and 2.0% coupons, and concluding with a $3.506bln of
UMBS30 2.0% and 2.5% coupons.
Current levels – 10s trading down -7/32s at ~.88%, MBS down -1.5/32s in our
benchmark UMBS30 2.0 coupon, with stocks up +420 points on the Dow.
Deanne M Powell |NMLS#231841 |PrimeLending Reno
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