Learn from the Past
Overview
Mortgage backed securities (MBS) gained 11 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week after three straight weeks of slowly rising mortgage rates.
The bond market focused primarily on the Fed and Jobs. Both were solid with the Fed keeping their key interest rate unchanged but having a more “hawkish” or “bullish” tone to their commentary. Job gains were solid as well. Generally that type of combination would be something that would pressure bond prices (higher rates) but it was offset by continued uncertainty and concern over tariffs and trade war escalations.
Central Bank Palooza
As widely expected, the Federal Open Market Committee (FOMC) kept their key Fed Fund rate unchanged in the 1.75% to 2.00% range. Their policy statement had a little more of a “hawkish” tone than their previous statement (when they met and increased rates in June).
Here are some of the more “hawkish” changes in language from their prior statement:
• Economic activity is “rising at a strong rate,” an upgrade from prior wording of “solid rate”
• Most of the minor wording changes are mark-to-market in the first paragraph’s economic assessment
• Job gains “have been strong,” and household spending and business fixed investment “have grown strongly”
• Unemployment has “stayed low” rather than “declined”
• Both headline and core inflation remained “near 2 percent”
• Household spending has “grown strongly” rather than “picked up”
• “Further gradual increases” repeated as expected policy path
• Risks to the outlook still “appear roughly balanced”
It was Big Jobs Friday, and Here is the Tale of the Tape
Jobs:
Non-Farm Payrolls for July 157K vs. estimates of 190K
Non-Farm Payrolls for June revised from 213K to 248K
Non-Farm Payrolls for May revised from 244K to 268K
The more closely watched rolling three month average is now a very robust 224K
Wages:
Average Hourly Earnings YOY 2.7% vs. estimates of 2.7%
Average Hourly Earnings MOM 0.3% vs. estimates of 0.3%
Unemployment:
The Unemployment Rate 3.9% vs. estimates of 3.9%
The Participation Rate 62.9% vs. estimates of 63.0%
ISM Services:
The July Non-Manufacturing data which makes up over 2/3 of our economic engine hit 55.7 vs. estimates of 58.6. This is a bit of a miss at about 3 points but any reading above 55 is still very strong.
What’s on the Agenda for this Week?
Overview
After last week’s action packed schedule, this week is fairly tame with only Friday’s CPI report having the gravitas to move the needle on pricing. MBS pricing will probably drift upward to meet the 50 day moving average which is only +12BPS from their open on Monday. After that, MBS would be right in that “danger zone” that has been wicked-accurate and not to be missed with. If we get some sort of real trade agreement, then MBS will sell off but there is not a very big chance of that.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Trade Wars, (2) Across the Pond and (3) Inflation Nation.
(1) Trade Wars: Plenty of “saber rattling” going on and none of it is giving markets any degree of comfort or certainty as to the scale and length of the Trade War. This not only includes China but also the Eurozone, NAFTA and others.
(2) Across the Pond: This week’s domestic data flow is coming from overseas with very key readings from the world’s largest economies. We will get both PPI and CPI out of China as well as their foreign reserves report. Japan will issue the Bank of Japan Summary of Opinions as well as their prelim 2nd quarter GDP. Germany will release their production and construction data.
(3) Inflation Nation: There will be our PPI and CPI data with the bond market focusing on Friday’s Core (ex food and energy) CPI YOY reading which is expected to remain at 2.3%
Treasury Auctions this Week
08/07 3 year note
08/08 10 year note
08/09 30 year bond
The Talking Fed this Week
08/08 Thomas Barkin
08/09 Charles Evans
Market Wrap-up
Overview
There were no major (or even minor) domestic economic releases to start the week. MBS did make a small movement towards the 50 day moving average and then could not stay there as they shied away from the “danger zone.”
Domestic Flavor
There were no domestic releases today.
On Deck for Tomorrow: JOLTS, 3 year Treasury auction and Consumer Credit.
Across the Pond
Germany Factory Orders: -4.0% vs. estimates of -0.4%.