Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
Generally, it takes around a 21 BPS movement for rates to be impacted. It was a big week for economic data with high inflation (PCE) and strong manufacturing data as well as very positive readings on the consumer. Usually, that type of economic data is very negative for mortgage rates. However, last week’s data took a back seat to the swirling changes in trade talks and escalating tariffs which more than offset the downward pressure from the economic data.
Domestic Flavor
Inflation Nation: The Fed’s “official” measure of inflation, PCE (personal consumption expenditures), was hotter than expected with the headline YOY number hitting 2.3% vs estimates of 2.2%. It was at 2.0% when the Fed’s raised rates at their last meeting. The Core YOY number hit 2.0% for the first time since 2012! Personal Income matched market expectations with a 0.4% MOM change and Personal Spending improved by 0.2% but that is short of the estimates of 0.4%.
Manufacturing: The bellwether Chicago PMI posted a blockbuster reading of 64.1 vs estimates of 60.1. This is the second highest reading this year and one of the highest readings on record. Some internals show problems filling vacant job openings, rising costs and increased new orders and backlogs – a just about everything that points to growth in the manufacturing sector.
Consumer Sentiment Index: The final reading for June was 98.2 vs May’s reading of 98.0, so it did improve month-over-month. Inflation Expectations for the next 12 months moved up to 3.00%.
Consumer Confidence: The June data was below expectations (126.4 vs estimates of 128) but ANY reading above 120 is an extremely high level and points to strong consumer spending.
GDP: We got the final and third look at the 1st quarter GDP. The final revision dropped to 2.0% which is down from the last revision of 2.2%. The surprise came in the form of the Price Index which jumped up to 2.2% from the last revision of 1.9%.
What’s on the Agenda for this Week?
Overview
This is a holiday-shortened week with an early close on Tuesday in the bond market that will not reopen until Thursday. MBS will remain at very elevated levels until Thursday when all the traders return to full strength. Then there will be a lot of economic data on Thursday and Friday that will most likely pressure MBS a little lower from pre-July 4th levels.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Trade Wars, (2) The Talking Fed and (3) Jobs, Jobs, Jobs.
(1) Trade Wars: They officially begin this week with Canada hitting the U.S. with tariffs on beef, soup, ketchup and whiskey. These are specifically targeted towards states that can have a major impact on the next round of elections in the U.S. but really have very limited macro-economic impact. However, on July 6th the big round of tit-for-tat tariffs between the U.S. and China start which each of them enacting $34B in Tariffs. Mexico is stepping in as well with tariffs on pork.
(2) The Talking Fed: Thursday’s release of the minutes from the last FOMC meeting where they raised rates will get a lot of attention from traders. But also, we start a new quarter which means the Federal Reserve will drop the amount of their purchases of MBS and Treasuries by another $10B. This is the third drop this year in their measured, stair-step pattern of reducing their balance sheet.
(3) Jobs, Jobs, Jobs: This is “Big Jobs Friday” week and the bond market will be paying very close attention to hourly wages which are expected to remain at a 2.7% pace on a YOY basis. Any movement higher than that will pressure pricing.
Market Wrap-up
Overview
MBS cannot go up but they are supported here until Thursday. There was once again very strong domestic data and even stronger PMI data from China. Usually those are both negative for pricing but uncertainty over the July 6th Trade War with China is providing support due to uncertainty.
Domestic Flavor
Manufacturing: Just like last week’s very strong Chicago PMI, the national ISM Manufacturing report was very robust and beat expectations with a 60.2 vs. estimates of 58.4. Input costs (ISM Prices Paid) were very lofty at 76.8 but were smidge lower than in May.
Construction Spending: The May data missed the mark with a 0.4% vs. 0.6% estimate but still showed monthly expansion. Residential spending rose 0.8% led by a 1.6% increase for new multi-family units, a 0.9% rise in home improvements, and a very useful 0.8% increase in new single-family homes. Year-on-year, residential spending is up a very strong 6.6% vs. 4.5% for overall spending.
On Deck for Tomorrow: Early bond market closes at 2:00 Eastern; Factory Orders.