What’s on the agenda for this week?
This is a holiday-shortened week
Thursday – the Bond Market will close early at 2:00pm EDT
Friday – the Bond Market will be closed all day
Even though this is a short week, there is a lot of big name economic data to digest like Retail Sales, CPI, Production and the Fed’s Beige Book. Plus we have a few “Talking Fed’s,” most notably Janet Yellen.
It’s Groundhog Day all over again, as the trading session once again starts off with economic news that would normally pummel pricing. But the “Teflon Bond Market” has shrugged it off. March Retail Sales were much stronger than expected and February’s data was revised upward. But this was once again offset due to a flight to safety into anything U.S. due to more news out of the Ukraine. This time, Pro-Russian supporters have taken over at least two Ukrainian Police stations and are refusing to leave. This has traders concerned that Ukraine may respond with force and escalate things further. As a result, mortgage backed securities (MBS) are down only -9 basis points (BPS) in early trading. Typically, with this type of strong Retail Sales data, MBS would be down at least -50BPS.
Wednesday’s release of the Fed’s Beige Book will be key as we learn how the manufacturing, housing, lending, and labor markets are doing in each Fed district.
There are no major U.S. Treasury auctions this week.
Retail Sales: Potentially, the most important economic release of the week. Headline Retail Sales for March were much stronger than expected (1.1% vs. estimate of 0.8%). Plus, February was revised upward from 0.3% to 0.7%. Excluding Autos, Retail Sales were up 0.7% vs. estimates of 0.5%. Retail Sales are the top of the economic pyramid, and these numbers come from a period where weather was an issue. This is certainly positive economic news and that means that this reading is negative for MBS pricing today.
Business Inventories: Generally not a major market mover. The consensus estimates are for a small improvement from 0.4% to 0.5%.
What happened last week?
MBS gained +47 BPS from last Friday’s close which caused 30 year fixed mortgage rates to move slightly lower from the prior week. The market saw the lowest rates on Thursday and the highest rates on Wednesday.
For the third straight week, the domestic economic data under normal circumstances would have caused MBS pricing to deteriorate. Consumer Sentiment was stronger than expected (82.6 vs. 81.0), Initial Jobless Claims were lower than expected (300K vs. 320K), the Producer Price Index was higher than expected (0.5 vs. 0.1) and Import Prices were higher than expected (0.6 vs. estimate of 0.2).
But once again, the growth in the U.S. was overshadowed by concern over China (this time over their weaker than expected import/export data) and Ukraine/Russia as tensions still mount. This caused more flight to safety by international traders which propped up demand for our bonds and completely countered our economic growth. As a result, interest rates improved.