Weekly Mortgage Overview: 5/6/2019

What’s on the Agenda for this Week?

Overview

Last week, there was a ton of big name economic data as well as the Fed to react to. This week, not so much. Other than Friday’s CPI release there are zero economic reports that have the gravitas to move pricing. The bond market will focus instead on the bevy of Fed speeches and any real movement on the China trade negotiations. MBS are having almost no reaction (+6) to the recent trade snore tweets while the stock market (DJIA) is down -270. As a reminder, these two have not been inversely related for several years. Look for pricing to remain at elevated levels all week but breaking above the channel is not likely based upon scheduled events. It would take an unscheduled geopolitical event to move pricing above the channel.

Three Things

The three areas that have the greatest ability to impact pricing this week are: (1) The Talking Fed, (2) Trade Snore and (3) Inflation Nation.

(1) The Talking Fed: Now that the FOMC statement is past, the embargo on Federal Reserve officials speaking publicly about policy has been lifted and there is a big dose of speakers this week:

05/06 Patrick Harker and Charles Evans
05/07 Robert Kaplan
05/09 Jerome Powell, Raphael Bostic and Charles Evans
05/10 Lael Brainard and John Williams.

(2) Trade Snore: After much confusion over the weekend, the Chinese delegation has officially confirmed that they are still going to physically meet in D.C. this week to continue trade talks. President Trump has threatened some additional pressure in the form of increased tariffs and that he would raise tariffs on $200 billion of Chinese goods to 25% on Friday from 10%.

(3) Inflation Nation: Bboth the Producer Price Index and the Consumer Price Index will be this week. Bonds will focus on the YOY Core (ex food and energy) CPI which is expected to move up a tick to 2.1%. Bonds are very sensitive to inflationary data.

Treasury Dump

Here is this week’s schedule for the Treasury auctions:

05/07 3 year note
05/08 10 year note
05/09 30 year bond

Learn from the Past

Overview

Mortgage backed securities (MBS) were unchanged from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.

With a net change of zero basis points, it appears as if it was a pretty boring week. But actually there was a lot of volatility as the long bond market reacted to the Federal Reserve and Friday’s jobs data. Overall, the message from the Fed was that our economy and labor market are very solid but they are going to wait and see how things develop before they take any action one way or another.

The Talking Fed

The Federal Open Market Committee released its Interest Rate and Policy Statement on Wednesday. You can read the official release here. Here are some key points:

• They kept their key interest rate (the Fed Funds Target Rate) unchanged at the 2.25%-2.50% range.

• They lowered the Interest On Excess Reserves rate (IOER) by 5bps to 2.35% hoping to push banks to lend rather than parking cash at the central bank.

• The decision is unanimous at 10-0; there have been no FOMC dissents since Powell became chairman in February 2018.

• Not “hawkish” nor “dovish” as the statement shows that the central bank is still reluctant to signal a policy bias in either direction.

• The FOMC adjusted its language on the economy, characterizing economic growth and job gains as “solid” while saying consumer spending and business investment slowed in the first quarter. The Fed acknowledges both overall and core inflation have declined and are running below 2%.

• Markets are focusing on Fed Chair Powell’s repeated statement that the low inflation is “transitory” and will move higher to norms.

Jobs

Big Jobs Friday! You can read the official BLS report here.

Here is the tale of the tape:

Jobs:

• April Non Farm Payrolls 253K vs. est. of 185K
• March NFP revised from 196K down to 185K
• Feb NFP revised from 33K up to 56K
• The rolling three month average is now 169K

Wages:

• Average Hourly Earnings rose 6 cents and is now $27.77
• Average Hourly Earnings YOY rose by 3.2% which matches March’s pace, April Estimates were for 3.3%
• Average Hourly Earnings MOM rose by 0.2%, March was revised upward from 0.1% to 0.2%

Unemployment:

• The Unemployment Rate fell to 3.6% vs. expectations of 3.8% and is now the lowest since 1969
• The Participation Rate moved lower from 63.0% down to 62.8%

Services

The April ISM Non-Manufacturing PMI which represents more than 2/3 of our economic engine was lighter than expected (55.5 vs. estimates of 57.0). Still a very good reading as it is above 50 but it was not as red hot as the market was projecting.

Manufacturing

The national ISM PMI had an expansionary reading of 52.8 vs. estimates of 55.0. Prices Paid hit vs. 55.0 est. of 55.1

Market Wrap-up

Overview

There was some fairly good Services PMI data from across the pond (China, Germany and Eurozone) but there was not any domestic data to sink your teeth into today. The news and market headlines were flooded with “what ifs” with trade talks but in the end, everything that was originally scheduled for this week is still on. As expected, the intra-day channel remains intact.

Trade Snore

The Chinese trade delegation has confirmed that it is still coming to Washington D.C. to continue trade negotiations regardless of the recent tweets and threats of higher tariffs.

The Talking Fed

Philly Fed President Patrick Harker said that trade tensions are part of an “umbrella of uncertainty” around policy that weighs on businesses and markets. “It’s not a healthy thing for the economy overall,” but “that said, we do want fair trade.”

Across the Pond

China: Caixin Services PMI 54.5 vs. estimates of 52.8.

Germany: Markit Services PMI 55.7 vs. estimates of 55.6.

Eurozone: Market Services PMI 52.8 vs. estimates of 52.5/Retail Sales MOM 0.0% vs. estimates of 0.1%.

On Deck for Tomorrow

JOLTS, Economic Optimism, 3 year Treasury Note auction and Consumer Credit.