What happened last week?
Mortgage backed securities (MBS) gained +62 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move lower and hit their best levels since May 29th. We saw the best rates on Friday and the worst on Monday. Both the stock market and MBS market closed in positive territory for the week.
Another week, another mixed week for domestic economic data as Retail Sales, Business Inventories, Consumer Sentiment and Weekly Jobless Claims all disappointed while Industrial Production and Capacity Utilization were better than expected. We also had two reports that showed very light inflation, which is always great for rates. Import Prices dropped -0.2% and the Producer Price Index was very low with a monthly reading of only 0.1%. The combination of all the economic data above was slightly positive for MBS and therefore good for mortgage rates.
But once again, it was the foreign headlines that kept up steady demand for our U.S. bonds and as a result rates made a big improvement on Friday as news broke out that Ukraine had attacked a Russian military column that had made its way across Ukraine’s borders. The “fear factor” bond buying spiked as a result due to traders being very concerned that Russia would answer in a very big way which could cause an all-out war to begin between the two.
What’s on the agenda for this week?
We will pull back from Friday’s highs and will not get back to those levels without another “fear-factor” spike. No domestic economic data this week can get us back to Friday’s highs. Our domestic reports may cause some slight intra-day movement depending on how far off from the consensus estimates they are but are unlikely to move MBS out of our channel. Only comments from Yellen on Friday or a spike in military escalation overseas can cause MBS to rally out of the trading channel.
MBS Overview
The two biggest events of the week are not actually economic data points. The release of the minutes from the last FOMC meeting will be closely read by traders looking to gain some insight into when the Fed will begin to tighten their Fed Fund Rate.
Jackson Hole, WY generally does not provide a lot of impact into MBS pricing but this time around it could be very different with the focus on Janet Yellen’s long awaited speech at the Jackson Hole 3-day symposium taking place August 21-23. The theme of this year’s symposium is entitled “Re-Evaluating Labor Market Dynamics” and Yellen is expected to deliver her keynote address on Friday morning. The consensus is that she will likely highlight that the alternative measures of labor market slack in evaluating the ongoing significant under-utilization of labor resources (e.g., duration of employment, quit rate in JOLTS data) have yet to normalize relative to 2002-2007 levels. Any sound bite that touches on the debate of cyclical versus structural drivers of labor force participation will also be closely followed.
International events will continue to play the primary role in MBS pricing this week as Russia did not attack Ukraine (which is what the market feared on Friday). The question remains…did the attack by Ukraine even happen as most now believe it was a complete fabrication. Obviously, this situation can pivot at anytime.