Rate market update and do trillion-dollar deficits matter anymore

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Published Date 11/20/2019

The trade war isn't progressing and possibly headed to a prolonged impasse. China won't agree to any specifics about how much agriculture products it will buy each year. President Trump is now saying if China and the US can't do a deal, "I like," I will continue increasing tariffs. On Dec 15th Trump will increase tariffs by another 15% unless significant progress occurs. The reaction this morning sending stock indexes lower (8:30 DJIA -93) after the index closed down 102 yesterday. The bond market is improving this morning, the 10 yr at 1.74% -5 bps. It is all treasuries so far, MBS prices not moving much; at 8:30 am ET MBS prices +3 bps from yesterday.

Weekly MBA mortgage applications last week -2.2% overall, purchases +7.0% refinances -8.0%. The prior week's refinances were +13.0%. Yearly growth in the purchase index, reflecting a tough comparison with the year-ago week, fell nearly in half, from 15.0% to 7.0%. The weekly rate, nevertheless, offers reassurance that home sales are moving higher.

FHFA extending the comment period to Jan 20th for investor comments on a proposal aimed at better aligning pooling practices for loans in uniform mortgage-backed securities. The proposal, a request for input on channeling the majority of Fannie Mae and Freddie Mac's production into larger, multi-lender pools while continuing to allow about 20%-30% of issuance to be comprised of custom or specified pools. Currently, specified pools represent 30%-40% of issuance. The plan also calls for the government-sponsored enterprises to align their policies regarding actions to be taken when prepayments on loans tied to a particular mortgage lender or servicer are unusual and have an adverse effect on MBS performance. (Nat' l Mtg. News).

Not just trade that is keeping the world on edge; today is boiling about the US Senate passing legislation supporting Hong Kong's pro-democracy protesters. China is upset; issuing a statement, "Don't say I didn't warn you," said a statement issued by the foreign ministry's office in Hong Kong, using a Chinese phrase that prior to this year was used only in rare cases like before a 1962 war with India. China doesn't have much latitude, though. China is trying to get a trade deal with the US while its economy is slowing and its economy the slowest in two decades. It is one more uncertainty that is pushing US interest rates down as investors are back in safety concerns.

At 9:30 am ET the DJIA improved from early futures market trading opened -50 after being down 100 at 7:00; NASDAQ opened -28, S&P -6. 10 yr at 9:30 am ET 1.76% after trading at 1.74% early this morning. MBS prices at 9:30 +2 bps from yesterday's close and +2 bps from 9:30 am ET yesterday.

Here we go again on Modern Monetary Theory (MMT). It's all about the rising fiscal deficit that hit $1 trillion in fiscal 2019, and is widely expected to continue climbing. US and global debt is screaming higher, and there is no likelihood it will ebb. The House Budget Committee will meet in Washington on Wednesday, seeking answers to a crucial question: Does it pose a clear and present danger to the economy? The idea with MMT is that deficits don't matter so long as the country finances its debt with its own currency. It is not "Modern," it was touted back at the beginning of 1904, and it failed. Back at the beginning of the year, it became a topic of discussion and is advanced by many to justify continually increased spending. The crux of it is that since borrowing costs are low, the government can spend without worry. The Fed Jerome Powell and others, including Warren Buffet, denounce it the notion. The scheme designed to ignore all of the spending and allow those that favor increased government largess to increase. "A convenient theory" for politicians determined to spend trillions and quoted Democrat-leaning economists, including Paul Krugman and Larry Summers slamming the doctrine. MMT isn't new, just rising from the ashes a 100 years ago that went array.

Technicals have all turned positive now that the 10 yr decisively broke 1.80% today. MBS's, though, are not moving much; this is one of the safety trades that can come and go at the speed of light pending trade and the ebb and flow each day about the condition of the equity markets and opinions whether it is over-extended or still a roaring buy.

Source: TBWS

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