What’s on the agenda for today?
MBS OVERVIEW
The much anticipated Non-Farm Payroll report arrived and it really disappointed. As a result, MBS shot up but then something interesting happened. They sold off and by the time your first live pricing is posted by your investors or secondary marketing department, many of you will only see a very small improvement in pricing. Watch today’s video and read below for more.
ECONOMIC DATA
Non-Farm Payrolls: Where a big disappointment. The market was expecting 185K new jobs but only got 113K. We have been stating that any reading below 160K would be positive for MBS. But just as important as this reading was the prior reading which if you recall was a big-time miss at only 74K. The market expected significant revisions upward but it was only revised up by a mere 1K to 75K. MBS shot up initially as a result.
Unemployment Rate: This dropped from 6.7% down to 6.6% but as we have discussed, bond traders largely ignore this reading. The only reason it has significance to traders is the 6.50% trigger that the Fed had originally pegged to their Fed Fund rate but they have recently stated that they would keep their rates low even after the Unemployment Rate breaks below 6.50%.
What happened yesterday?
MBS OVERVIEW
Our benchmark Fannie Mae mortgage backed security (MBS) lost -10 basis points (BPS) from Wednesday’s close which moved mortgage rates higher for the day. Since Monday’s highs, which were the best pricing of 2014, MBS have pulled back -79BPS.
We had the potential for some real volatility out of the European Central Bank (ECB) but they left their key interest rate unchanged and didn’t announce any real shift in policy.
Essentially, MBS moved in a narrow range as there has not been enough negative economic data to cause traders to think that Friday’s NFP will be weak. Nor has there been enough positive economic data (plus the head winds of cold weather) to support a better than expected report.
ECONOMIC DATA
Initial Weekly Jobless Claims: Were a bit lower than expected with a reading of 331K vs est of 355K but the prior period was revised upward from 348K to 351K. Continuing Jobless Claims also came in lower than expected (2.964 million vs 2.995 million). This reading was slightly negative for MBS.
Trade (imbalance): The trade balance in December was larger than expected, which means our economy is importing more goods. This was not a major factor in pricing this morning.
Non-Farm Productivity: Bonds love strong productivity data…if you can make more with less…well that is the cure for inflation. This reading came in at 3.2% vs est of only 2.5% plus, the prior period was improved from 3.0% to 3.60%. Unit Labor Costs dropped -1.6%. This is all positive news for bonds but given the overall downward trend right now, it is unable to break MBS into positive territory.
Talking Feds: We had Tarullo and Rosengren neither said anything new nor do they have the gravitas to move the markets.
THE TECHNICALS
The bond market was effectively “on pause” as traders simply don’t have enough compelling economic data to place their bets ahead of tomorrow’s all important Non-Farm Payroll report. As a result, MBS were relegated to trade in a narrow range capped by our 200 day moving average (we told you yesterday that this would be the case) and supported by our 10 day moving average which has been tested and MBS have even traded below it.
ACROSS THE POND
The Bank of England (BOE) left their key interest rate unchanged and so did the European Central Bank (ECB). More importantly, ECB President Draghi did not pull the trigger on their version of QE which would have caused some major volatility in our bond markets.
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