Learn from the Past
Mortgage backed securities (MBS) lost just 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
While rates were very similar at the end of the week compared to the prior week, there actually was a little volatility during the week with mortgage rates rising due to strong economic news and some positive sentiment on the progress of the U.S./China trade talks. However, on Friday MBS rebounded which caused rates to move back to their starting position at the beginning of the week due to a smaller than expected rise in wages and more turmoil that is the soap-opera of Brexit.
On Friday the big labor report was issued.
Here is the Tale of the Tape:
-March Non Farm Payrolls (NFP) higher than expected 196K vs. est. of 180K.
-February NFP revised upward to 33K from 20K, will be revised again.
-January NFP revised upward to 312K from 311K.
-The more closely watched rolling three month average is now 180K.
-The Unemployment rate remains at 3.8% which matched market expectations.
-The Participation rate is 63.0% vs. estimates of 62.9%, but it is a decline over February’s pace of 63.2%.
-The Average Hourly Earnings moved up by 0.1% on a MOM basis to $27.70 per hour.
-Average Hourly Earnings YOY increased by 3.2%, which was below estimates of 3.4%.
The March ISM Services (2/3 of our economy) had a very strong and expansionary reading of 56.1. The problem is that the market was expecting 58.0 and it is coming off of a pace of 59.7 in February. Markit ISM for March was stronger than expected though, at 55.3) vs. estimates of 54.8.
This report has been all over the place over the past four months and most economists and bond traders are not giving it the weight that it once enjoyed. The February data appears to be much worse than expected with the headline reading at -0.2% vs. estimates of +0.3%. However, the miss is because January was revised upward from 0.2% to 0.7%. Same goes for Retail Sales Ex-Autos (-0.4% vs. estimates of +0.4%) as January was revised upward significantly from 0.9% to 1.4%.
The March ISM Manufacturing report was stronger than expected (55.3 vs. estimates of 54.2) This is also much stronger than February’s reading of 54.2 demonstrating that there is an upward, not downward, trajectory of manufacturing in the U.S. Prices Paid were also higher (inflationary) than expected with a 54.3 vs. estimates of 52.5.
The February data was almost three times higher than expectations (1.0% vs. estimates of 0.4%) and January was revised upward from 1.3% to 2.5%. Ending for the bellwether Chicago PMI was lighter than expected (58.7 vs. estimates of 61.0). However, ANY reading above 55 is VERY robust growth. However, Residential Spending dropped by 11.7%. All the gains were in public works and commercial.
What’s on the Agenda for this Week?
Notice that of this week’s Three Things, none of them are Brexit. That is because many consider Brexit beyond all repair. It will continue to provide great support for MBS pricing but nothing will actually be accomplished or moved forward on that front as the bond market has Brexit fatigue. The earliest action (if there ever is any) would be April 10th or 12th. As far as economic data, there is a ton of CPI both domestically and overseas. The only way that MBS pricing could be hurt is if they are collectively much higher than expected, which experts feel is remote. The biggest domestic event of the week, the Minutes from the last FOMC meeting, is unlikely to provide any “behind the scenes” surprises. Look for MBS to continue to trade at very elevated ranges this week.
The three things that have the greatest ability to impact backend pricing this week are: (1) Trade Snore, (2) the Talking Fed and (3) Inflation
(1) Trade Snore: Trade talks will continue this week via teleconferencing. The bond market will be looking for more progress. If there are any major milestones that are confirmed it could have a negative impact on pricing. But if we get more vague “it’s going well” type of commentary then MBS will not have much movement.
(2) The Talking Fed: This is a very busy week that will focus on Wednesday’s release of the Minutes from the last FOMC meeting where it seemed to tilt more to the “dovish” side of policy. But key members will also speak, including Vice Chair Clarida and Governor Bowman.
(3) Inflation: There will be a few key readings this week, including CPI, PPI and Import Prices. But the bond markets will focus on our Headline CPI which has remained at the 1.8% (while Core has been above 2%). Given all of the recent economic data, the markets are not expecting this trend line to change. However, CPI across the pond is more of a wild-card with key readings from China and Germany.
Our nation’s unsustainable debt will be dumping into the markets with three auctions:
04/09 3 year note
04/10 10 year note
04/11 30 year bond
It was a very tame open to the week with no new developments in Trade or Brexit to cause MBS to move. As expected, the ceiling of resistance has held and MBS have retreated after testing for some very small losses.
Factory Orders: The February data was a smidge better than expected (-0.5% vs. estimates of -0.6%) but January was revised lower from 0.1% to 0.0%.
On Deck for Tomorrow JOLTS, Small Business Optimism, Economic Optimism, 3 year Treasury note auction, FNMA Monthly Bond Coupon Rollover.