What happened last week?
Overview
Mortgage backed securities (MBS) gained 17 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve slightly from the prior week.
There were several positive economic reports; however, they were overshadowed by global European Central Bank inaction. And their inaction was due to polling data that showed a significant shift towards the “leave” vote among the British.
Across the Pond
Central Bank Palooza: The bull dog is wagging its tail. The bull dog is the Brexit and the tail is the Central Bank. After our Fed bowed out Wednesday, we had two more that did nothing as the world is on pause until this week’s vote.
Bank of England: The BofE left their key interest rate unchanged at 0.5% and their asset purchase program at the same levels, The vote was 9 to 0 as obviously, they do not want to do anything until the vote.
Bank of Japan: The BofJ was actually widely believed to ease some more at this meeting but they took their marching orders and held off, citing their Upper House elections and the Brexit. But traders expect an easing at the next meeting.
The Talking Fed
You can read their official policy statement here:
http://www.federalreserve.gov/newsevents/press/monetary/20160615a.htm
You can read their economic projections here:
http://www.federalreserve.gov/monetarypolicy/fomcprojtabl20160615.htm
Key points of the Fed’s policy statement:
– Last meeting, Esther George voted against leaving rates alone, instead favoring a rate hike. This time around she changed her vote so that it was unanimous.
– Only one Fed member in March expected just one rate hike in 2016 (meaning everyone else expected two or more rate hikes in 2016). This time around there are now 6 Fed members that expect only one rate hike in 2016.
– Growth in economic activity has picked up.
– Labor Market Indicators to strengthen gradually but that the pace of labor growth is slowing.
– Mentioned a strong 2.5% increase in wages on a YOY basis.
– Cut its expectation for full-year gross domestic product growth, from 2.2% at the March meeting to 2.0% this week. The committee also lowered its 2017 projection a notch, from 2.1% to 2.0%.
During Janet Yellen’s live press conference she was directly asked about the Brexit and said that it was discussed and was a big concern of the Fed. She also reiterated that they are not on any kind of fixed path for rate increase, cuts or leaving them alone.
What’s on the agenda for this week?
Overview
The polling data out of Britain will drive bond markets. Look for some volatility on Wednesday afternoon as traders “place their bets” ahead of the vote. And then regardless of the outcome, Thursday will see a lot of momentum.
The Big 3
The following are the three events that bond traders will be paying the most attention to this week (1) Brexit Vote, (2) Yellen is Yelling and (3) Durable Goods Orders.
(1) Brexit Vote: The British will vote and when our market opens Thursday morning, we should know if they are going to stay in the European Trade Union or not. If not, they will have 2 years to iron out the individual trade agreements with each European country and MBS will sell off as the bond markets have a lot of money parked in bonds ahead of this event.
(2) Yellen is Yelling: She will testify before the House and Senate this week. While we don’t really expect anything new from her since we just had a big Fed meeting last week, her responses to their questions can move bond markets. Thursday will be more closely watched than Wednesday. Normally, it’s just a carbon copy of the prior day’s remarks. But we should know the outcome of the Brexit vote Thursday morning and this could greatly influence Janet Yellen’s remarks that day.
(3) Durable Goods: This will be our first major domestic economic report after the Brexit vote and will be closely watched to see how our manufacturing sector is doing.
Treasury Auctions this Week
06/20 2 year note
06/21 5 year note
06/22 7 year note
The Talking Fed
06/20 Neel Kaskhari
06/21 Janet Yellen
06/22 Janet Yellen
06/23 Robert Kaplan
Market Wrap-up
Overview
It was a very boring session with little to no reaction to the stock market rally and a very good Treasury auction. MBS pulled back from their technical resistance but still have great support. The main story today was a shift in polling data regarding the “leave” vote for Great Britain still in the lead but losing some steam which has definitely pressured MBS today.
The polling data out of Britain will drive bond markets. Look for some volatility on Wednesday afternoon as traders “place their bets” ahead of the vote. And then regardless of the outcome, Thursday will see a lot of momentum.
Domestic Flavor
Treasury Auction: Today kicked off three days of adding Treasury note supply to the marketplace with the 2 year note auction which was very well received. $26B was sold with a high yield of 0.745% compared last month’s rate of 0.920%; it’s a nice drop and is the lowest in 2 years.
The Talking Fed: Minneapolis Fed President Neel Kashkari spoke about “too big to fail” and expressed concern over the stress tests and the resulting amounts that institutions have on the sidelines and not going to work. He said, “More capital has downsides that need further exploration. In particular, higher capital could raise the cost of lending and potentially reduce economic activity.” He did not address the path of rate hikes.
On Deck for Tomorrow: Another boring session with only a 5 year Treasury note auction.