Learn from the Past
Overview
Mortgage backed securities (MBS) gained 55 basis points from last Friday’s close which caused fixed mortgage rates to move to a new all-time record low.
Domestic Flavor
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims continue to trend above 1.4M each and every week with 1.434M new filings vs. estimates of 1.450M. Continuing Claims climbed back above the 170 mark with 17.018M vs. estimates of 16.2M.
The Talking Fed: The Federal Reserve kept their key Fed Funding Rate at 0.25%. Here are some key points from the statement and Fed Chair Powell’s comments:
• “The path of the economy will depend significantly on the course of the virus”.
• “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term”.
• Powell said that the full amount of their emergency lending facility has been underutilized due to the fact that the Fed has stabilized commercial lending and companies have access to credit again under normal channels so the emergency lending via the Fed is not needed as much.
GDP: The preliminary 2nd quarter GDP showed a contraction of -32.9% which is the worst on record. The consensus estimates were for 34%. The Prices Paid turned deflationary at -2.1% vs. estimates of +1.9%. The Great Recession of 2007-2009 saw GDP fall by -4.3%.
Personal Income and Outlays: June Personal Incomes dropped by -1.1% which was larger than the consensus estimates of -0.5% and follows a contraction in May of -4.4%. Personal Spending increased by 5.6% vs. estimates of 5.5%.
Inflation Nation: The Fed’s key interest rate gauge, Personal Consumer Expenditures (PCE) showed no threat of inflation with the headline YOY PCE at 0.8% vs estimates of 0.5%. Core YOY PCE was only 0.9% vs. estimates of 1.0%.
Manufacturing: July Chicago PMI broke back into expansionary territory with a 51.9 vs. estimates 43.9 reading.
Consumer Sentiment: The July Final reading was revised to 72.5 vs. estimates of 73.0.
What’s on the Agenda for this Week?
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Stimulation Nation, (2) Jobs, Jobs, Jobs and (3) Coronavirus.
(1) Stimulation Nation: The two sides still appear to be far apart on the next round of stimulus, with liability protection and “helicopter money” for unemployed and state governments the main points of contention. As long as this is “twisting in the wind”, MBS will continue to perform well but once there is an agreement (most likely an agreement for an agreement), you will see MBS sell off from our current levels.
(2) Jobs, Jobs, Jobs: There is a deluge of jobs related data this week culminating with Big Jobs Friday. The markets are expecting the Unemployment Rate to fall into the 10s and Non Farm Payrolls to show new job additions of 1.65M despite the fact that each and every week over 1.4M new jobless claims are filed in states.
(3) Coronavirus: The world is dealing with what some areas are calling the 2nd wave and some are calling it the 3rd wave. Regardless, it is obvious that areas that were thought to be “through” with the virus like Spain and China are obviously not as there is no immunity that lasts more than a month or two and nations that have emerged from lockdowns are simply seeing those very same people get infected again. Meanwhile, global totals are now over 18 million with over 250K new cases globally each and every day. The latest round of lockdowns will continue to suppress any type of economic recovery which is positive for bonds.
The Talking Fed
Here is this week’s speaking schedule.
• 08/03 James Bullard, Charles Evans
• 08/05 Loretta Mester
• 08/06 Robert Kaplan, Fed Balance Sheet
Market Wrap-up
Domestic Flavor
Manufacturing: The July national ISM Manufacturing PMI showed expansion with a 53.2 vs. 52.0 estimates. New orders spiked to 61.5 vs. estimates of 46.8 but Employment tanked to 44.3 vs. estimates of 48.3.
Construction: June Construction Spending contracted by -0.7% which was a little worse than expectations of -0.5%.
On Deck for Tomorrow: Factory Orders, Economic Optimism.