Weekly Mortgage Overview: 6/4/2018

Learn from the Past

Overview

Mortgage backed securities (MBS) lost 1 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week. But it was a very “choppy” session with a large spread of -59BPS from best pricing of the week (lowest rates) to the worst pricing of the week (highest rates).

It was a holiday-shortened week that started on a big upswing (lower rates) due to Geo-Political concerns over Italy’s government and debt issues potentially crashing the Eurozone. However, there was some very strong domestic economic data and by the end of the week both Italy and Spain were able to form new governments which calmed down the markets and caused MBS to lose their “fear factor” premium.

Jobs, Jobs, Jobs

Big Jobs Friday was las week! And here is the “tale of the tape”:

Jobs:

May Non Farm Payrolls 223K vs. estimates of 188K
April NFP revised from 164K down to 159K
March NFP revised from to 135K up to 155K
The more closely watched rolling 3 month average is now 179K

Wages:

Average Hourly Earnings YOY 2.7% vs. estimates of 2.7%
Average Hourly Earnings MOM 0.3% vs. estimates of 0.2%

Unemployment Rate:

Unemployment Rate 3.8% vs. estimates of 3.9%
Participation Rate 62.7% vs. estimates of 62.6%

Domestic Flavor

ISM Manufacturing: This was a very strong report! The headline reading beat estimates with a 58.7 vs. 58.1 reading. But the Prices Paid when through the roof with a 79.5 reading. Chicago PMI was very strong with a 62.7 reading vs. estimates of 58.4. Any reading above 60.0 is rare and very expansionary.

Inflation Nation: The Fed’s “trigger” rate, PCE YOY remained at 2.0% and the Core PCE YOY hit 1.8% which matched expectations and March was revised lower from 1.9% to 1.8%. Personal Spending shot up 0.6% vs. estimates of 0.4% and Personal Income matched forecasts with a 0.3% monthly gain.

Japanese Taper

The Bank of Japan chose to cut the size of its purchases of 5-to-10 year JGBs from 450bn to 430bn yen.

What’s on the Agenda for this Week?

Overview

This is a very light week for domestic economic data. The tariff tantrum is actually bad for pricing. Look for MBS to be in the 50 day moving average. It will take some geo-political volatility for MBS to crack above that level and if it does, it is not sustainable.

Three Things

The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War, (2) Geo-Political and (3) Across the Pond.

(1) Trade War: Now that the metal tariffs are in place, the bond markets will continue to monitor the non-stop trickle of “tit-for-tat” responses from the impacted countries. But foreign tariffs on bourbon, soy beans and other small target but big headline moves are not going to move pricing. Instead, the bond markets are solidly focused on China and trade talks there.

(2) Geo-Political: While Spain and Italy seemingly have new governments in place, there is still plenty of unrest and instability in the Eurozone. And no one has a plan to solve the massive amounts of debt problems. Most of that debt is owned by European banks or the ECB itself. And unlike Greece, these are much more threatening to the system.

(3) Across the Pond: Domestically, this is a very light week for data and zero Fed speeches or Treasury Auctions to contend with. Only Tuesday’s ISM Services has the gravitas to move the needle on pricing. But overseas there will be a lot of PMI and GDP data that could have an impact on long bonds.

Market Wrap-up

Overview

Jobs: Yes, the big report was Friday but there was a lot of geo-political smoke that was clouding trades. Today, MBS were pushed lower due to Friday’s Jobs data as the geo-political fear factor ebbed. It was a light day for economic data with no major reports impacting pricing.

Domestic Flavor

Factory Orders: The April MOM report fell by -0.8% which was more than the projected -0.5%, but March was revised upward.

On Deck for Tomorrow

Japan and China PMI Services, ISM Services, JOLTS and Mario Draghi.