Learn from the Past
Overview
Mortgage backed securities (MBS) lost 25 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher for the week.
It was a fairly light week for economic data and the few reports that were issued were very strong, which is negative for rates. The long bond market was focused on what could come of the G7 meeting, and while there were plenty of headlines out of that meeting, there was no real action.
Domestic Flavor
Jobs, Jobs, Jobs: The Job Openings and Labor Turnover Survey (JOLTS) hit 6.698M vs. estimates of 6.40M. Plus the prior month was revised upward significantly. This is a VERY strong reading and it’s one of the few times where there are actually more jobs available than there are people that are unemployed.
ISM Services: The May reading hit 58.6 vs. estimates of 57.5. The services sector represents more than 2/3 of our economic engine. This is one of the top readings in recent history.
Economic Optimism: The June IBD/TIPP Economic Optimism Index improved from 53.6 in May to 53.9 in June.
G7
The G7 meeting produced plenty of headlines and tweets but didn’t produce anything else. As there was no real movement on trade/tariffs that was any different than before the G7 gathering.
What’s on the Agenda for this Week?
Overview
This is a VERY pivotal week. And it’s one that could move MBS out of their relatively sideways range for the past several weeks. While tariff/trade wars with the Eurozone and NAFTA countries will continue to heat up, the real focus is on China. Any progress there (presumably in response to the Singapore summit) will have a tremendous impact on pricing. The 3 Central Banks (U.S., European Central Bank (ECB) and Bank of Japan) will all carry a lot of weight with traders as future rate tightening and/or tapering schedules will take center stage. For there to be any real and meaningful improvement in pricing, the U.S./North Korea meeting would need to be a disaster…AND a very dovish tone to the fed…AND a dot plot chart that is pushing out rate hikes into 2019 and 2020…AND the ECB has to punt on any real discussions with the end of their quarter. That is an awful lot to ask for and while anything can happen, that scenario does not have a very high probability. So, it is better to take the other side and assume that the meeting might not yield an agreement but it won’t be a disaster, and the Fed will raise rates, and the dot plot still shows the majority of dots represent 4 hikes this year (they always have but traders refuse to believe it).
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Singapore Summit, (2) The Talking Fed and (3) Central Bank Palooza.
(1) Singapore Summit: The on-again, off-again, on-again Summit will finally take place on Tuesday. It will be a historic event with the leaders from the U.S. and North Korea meeting face-to-face for the first time ever. This is the one event this week that has the most question marks around it and could lead to a lot of market volatility. An agreement on denuclearization would remove a lot of market fear and may even help move the new trade agreement with China forward. But a collapse in talks would lead to increased geo-political fear and instability.
(2) The Talking Fed: The FOMC will conclude their two days of meetings on Wednesday. It is widely expected that they will raise their key Fed Fund Rate by a 1/4 point. But that is not what is going to move markets. The bond market will be focusing on the release of their Economic Projections (the famous dot plot chart) to see what their future rate tightening projections are. We also get a live press conference with Fed Chair Jerome Powell right after the release of their policy statement. Hidden in all of this attention on rates is the fact that we will also get the results of their recent round of “bank stress tests.”
(3) Central Bank Palooza: Besides our own Fed, there will be very key policy statements from the European Central Bank (ECB) on Thursday and the Bank of Japan (BofJ) on Friday. The ECB has telegraphed to the markets that this is a “live” meeting and we may get some direction on the timing of ending their massive QE program. Meanwhile, the BofJ has already curbed their U.S. Treasury purchases and the U.S. will be looking for more direction from them.
On the Radar: This is such a big week, there is more than just the “Three Things.” There will also be some important domestic economic data (Retail Sales and CPI) as well as an important Brexit vote on Tuesday. The Eurozone is set to release their most recent round of tariffs against the U.S. by July 1 but there will be several of them this week.
Treasury Auctions this Week
06/11 3 year Note, and 10 year note
06/12 30 year bond
Market Wrap-up
Overview
There were no domestic economic releases and MBS had no reaction to today’s Treasury auctions (as usual). The bond market moved sideways in a tight space as traders wait to see what unfolds in tomorrow’s Singapore Summit and Wednesday’s Fed rate hike.
Domestic Flavor
Treasury Auctions: There were two today and they both went very well. The three year note saw $32B go off at a high yield of 2.664% which dropped to the same level as last month and had a very strong bid-to-cover ratio of 2.84. The 10-year note saw $22B go off at a high yield of 2.962% vs. last month’s auction of 2.995%. Demand was solid at 2.59.
On Deck for Tomorrow
Bond coupon rollover, Singapore Summit, FOMC meetings begin, CPI and 30 year Treasury auction.