What’s on the agenda for this week?
Mortgage backed Securities (MBS) sold off immediately as traders took the money that they parked into bonds over the long weekend out and back to work. We do not expect a major sell off as international concern over Ukraine/Russia et al will keep a nice floor in place for long bonds. Friday’s NFP report is unlikely to be the major market catalyst that it has been in the past as it will take a reading above 250K for MBS to sell off and a reading below 185K for MBS to rally.
We have a holiday-shortened week that is crammed with big economic reports that we really need to pay attention to.
Of course, the primary focus is on Friday’s Non-Farm Payroll (NFP) report which is expected to remain at or above that 200K level. There are several labor related reports this week:
- Challenger Job Cuts
- ADP Private Payroll
- Initial and Continuing Jobless Claims
- Unemployment Rate
Plus, several of the other economic reports this week will have a labor component to them.
On the Manufacturing front, we have a lot of data as well:
- Construction Spending
- ISM Manufacturing
- Factor Orders
We round out our economic data with ISM Non-Manufacturing, Total Vehicle Sales and the Fed’s Beige Book. Plus we have a lot of “talking Feds”:
- 09/04 Powell
- 09/05 Fisher, Kocherlakota and Plosser
The long bond market will also being paying very close attention to the NATO summit on Thursday and Friday. Of concern is of course Ukraine, which is NOT a part of NATO. The market is very concerned that somehow NATO will be brought into the fray which would directly drag the U.S. into a war with Russia.
What happened last week?
MBS Overview – Learn from the Past
MBS gained +37 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to decrease and wiped out the prior week’s -37 BPS sell off. We saw the best rates on Friday and the worst rates on Monday.
There were several economic reports that showed more positive momentum for our economy. Both the Consumer Confidence (92.4 vs estimate of 89.0) and Consumer Sentiment Index (82.5 vs estimate of 80.2) were better than expected and show that consumers have a positive outlook on our economy which may lead to more spending down the road. Second quarter GDP was revised upward from 4.0% to 4.2% which shows that the initial reading of 4.0% was not a fluke.
Durable Goods Orders were very high with a reading of 22.6 but it was discounted by traders as the majority of the spike in orders were large Boeing and other transport sector orders. Pending Home Sales were better than expected (+3.3% vs estimate of +0.6%) which may be reflective of the strong consumer readings mentioned above. Inflation was very low with the PCE year-over-year reading at 1.6% which is well below the Fed’s target of 2.0%. To round out the week there was a very robust Chicago PMI reading (64.3 vs estimate of 56.0) which shows strong demand for manufactured goods.
So overall, the economic data was strong which would “normally” cause MBS to sell off and cause mortgage rates to rise. But they didn’t. Instead they improved which caused mortgage rates to get better. This was directly due to heightened concern over Ukraine and Russia as Russian troops were in territory claimed by Ukraine but controlled and occupied by Pro-Russian separatists. And financial markets across the world were concerned that this would escalate into a full blown war. That is why we saw the best pricing of the week on Friday as traders “parked” their money in the low-yield and high-safety world of long bonds ahead of the three day weekend.