URGENT NOTE FOR THE HOLIDAY WEEK
This week could hold a lot of volatility. So what’s up? First, it’s a holiday-shortened week; the markets will be closed on Friday. Plus the MBS market closes early on Thursday at 2:00EST.
That means that bond traders are going to be in short supply on Thursday as the majority of the traders are gone after Wednesday’s close. This could cause some huge swings in pricing because you have the powerful combination of fewer traders and less volume with very important economic data such as Non-Farm Payrolls.
The entire week is packed with big time reports. In the manufacturing arena there is Chicago PMI, ISM Manufacturing and Factory Orders. These reports will also contain inflationary data as well as labor demand.
There will also be a large number of labor related releases with ADP Private Payrolls, Initial Jobless Claims, Challenger Job Cuts, Non-Farm Payrolls and the Unemployment rate.
Plus, we have some general macro-economic releases like Pending Home Sales, Construction Spending and ISM Services (2/3 of our economy).
As you can see, there is a lot to digest this week and the key will be if we continue to see very good growth in the manufacturing sector and if the lagging labor market will show some improvement.
But with the skeleton crew of bond traders, we could see come wild swings on Wednesday and Thursday due to low volumes.
The 2014 high for our benchmark Agency Fannie Mae 3.50 coupon was on May 28th with a closing price of 103.18, the price as of 06/27/14 1:20EST was 102.77. So the upside is likely a maximum of only +41BPS. Even this would take a big miss on several reports including Non-Farm Payrolls. 1st quarter GDP aside, there have been steady readings above 200K for NFP and very strong manufacturing readings lately.
The low occurred on June 17th with a close of 101.70 so the potential downside looks like -107 BPS with strong NFP data.
Things could be quiet, but given the positive run we’ve all enjoyed it could be argued there is much more to lose than gain.
While there are many economic releases, the bond market will be most focused on the key readings of manufacturing and jobs.
The manufacturing data which includes Chicago PMI, ISM and Factory Orders, contain key information about our economic growth, price inflation and labor demand.
But the spotlight is on Jobs, Jobs, Jobs, with the release of the ADP Private Payrolls and Thursday’s release of the Non-Farm Payrolls (NFP).
NFP is projected to be in the 200K to 217K range. But it doesn’t matter on what the number actually is as long as it is above 200K to keep our recent streak of readings above 200K alive. If we get a reading above 250K, then we could see some pressure on pricing. We would need a reading below 185K for MBS to rally on this report.
We do not have any major Treasury auctions this week but we do have key speeches from Treasury Secretary Jacob Lew and Fed Chair Janet Yellen.
International Flavor: Argentina is poised to miss a bond payment today of $539 million and is on the brink of its second default (yes second) in just 13 years.
Chicago PMI: Came in at 62.6, the consensus estimates ranged from 61.0 to 63.0 – so this was right in that range. A reading above 50 shows manufacturing expansion and any reading above 60 is red-hot. This is a slight negative for MBS.
Pending Home Sales: Blew away the consensus estimates of +1.5% with a reading of +6.1%.
WHAT HAPPENED LAST WEEK?
Learn from the Past
Mortgage backed securities (MBS) gained +37 basis points (BPS) from last Friday’s close, which caused 30-year fixed mortgage rates to move to slightly lower.
The real story last week wasn’t domestic at all as international money poured into U.S. bonds and helped our rates as a result. This “flight to safety” was largely due to weaker economic data out of Europe and escalated action in the Ukraine and Iraq.
The U.S. consumer showed up last week with better than expected readings with Consumer Confidence (85.2 vs estimate of 83.5) and Consumer Sentiment (82.5 vs estimate of 82.0) which directly correlated to better than expected Existing Home Sales (4.89M vs estimate of 4.76M) and New Home Sales (504K vs estimate of 440K).
But Durable Goods Orders were much weaker than expected and the 1st quarter GDP data was revised downward for a final reading of -2.9%. The bond market largely ignored this data as it is too old and not in any way indicative of the type of growth our economy will see in the third and fourth quarters.
PCE was 1.8% on a year-over-year basis which is below the 2.0% “trigger” mark that Janet Yellen and the Fed have pegged as a threshold for raising their Fed Fund rate. Since this was below the 2% mark, bonds rallied.
Two and 7 year Treasury auction saw worse than average demand (as measured by the bid-to-cover ratio) and 5 year saw better than average demand but the MBS market was not impacted by these auctions.