Learn from the Past
Mortgage backed securities (MBS) gained 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower for the week.
The bond market (specifically MBS) continued to trade below the 100 day moving average which has been an extremely strong technical resistance level. Overall, the message from the Fed last week was that tax reform and lower regulations have kept our economy growing and will warrant continued and gradual rate hikes. However, they are concerned about the unknown trade war duration and impact on the economy.
The Talking Fed
Fed Chair Jerome Powell spoke at the annual Economic Symposium in Jackson Hole, WY. His take was very solid, here are a few highlights:
- Expects the strong economy to continue to grow
- Does not see a an elevated risk to overheating
- Gradual process of normalization (rate hikes) remains appropriate
- Anyone that wants a job can find one
Kansas City Fed President Esther George (non-voting member) said she sees two more hikes this year. “Based on what I see today, I think two more rate hikes could be appropriate.”
St. Louis Fed President James Bullard (non-voting member) has a more dovish bias and said, “If it was just me I’d stand pat where we are and I’d try to react to data as it comes in.”
Cleveland Fed Presidentt Loretta Mester (voting member) took the opposite view, saying she still thinks raising rates gradually is appropriate.
They issued the Minutes from the last FOMC meeting. Really, there were no surprises there. They certainly made it clear that there would be a rate hike at the next meeting but will see how trade issues impact their growth projections before pushing for a fourth hike this year. They discussed that they would have to drop the “remains accommodative” phrase soon after a couple more rate hikes.
China and the U.S. concluded their round of meetings in D.C. with no deal, but that was expected as they are on a “road map” to setting things up for a meeting with Presidents Xi and Trump in the fall.
Taking it to the House
The June FHFA Home Price Index showed a monthly price increase of 0.2% and an annual increase of 6.5%. New Home Sales for July came in at 627K vs. estimates of 645K and a prior revised reading of 638K. There are now 5.9 months of inventory supply. New Home Prices rose 6% to $328,700, which is why more new homes are not being built/sold. The Median Existing Home Price is now $269,600…and there you have it. July Existing Home Sales came in at an annualized rate of 5.34M units which was very close to market expectations of 5.40M. The median existing-home price for all housing types in July was $269,600, up 4.5% from July 2017 ($258,100). July’s price increase marks the 77th straight month of year-over-year gains.
What’s on the Agenda for this Week?
Last week MBS trended along the top of the trading channel which means skimming along the bottom of the “danger zone.” This week, MBS are expected to move lower and skim along the bottom of the channel for a little worse pricing. This is due to at least one trade deal getting done, PCE remaining in the 2% range and strong domestic data throughout the week.
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Trade Snore, (2) Inflation Nation and (3) Domestic Flavor
(1) Trade Snore: The U.S. and Mexico are said to be near a deal on NAFTA and we may even see an official announcement today. This would be the first “real” movement in trade talks with any major trading partner and would signal to the bond market that deals can get done and would pressure MBS as a result.
(2) Inflation Nation: The Fed’s preferred measure of inflation, Personal Consumption Expenditures (PCE), will be released on Thursday and is the most important economic release of the week. The YOY readings will get the most focus. The Headline is expected to remain at 2.2%, but the Core reading (ex-food and energy) will get the most weight and it is expected to tick up from 1.9% to 2.0%. The higher this reading is, the worse it is for pricing.
(3) Domestic Flavor: This is a very big week for economic data. Besides the PCE data mentioned above, there will be the first revision to the monster 2nd quarter GDP which is expected to remain at 4.0% to 4.2%. There will also be important readings from the consumer with Consumer Confidence and Consumer Sentiment. Chicago PMI on Friday will also get a lot of attention.
Here is this week’s schedule of note auctions, all of these are notes and are too short of a term to impact the longer end of the yield curve on long bonds.
08/27 2 year note
08/28 5 year note
08/29 7 year note