What happened last week?
Mortgage backed securities (MBS) lost -131 basis points (BPS) from last Friday’s close which more than wiped out the prior week’s gain of +69 BPS and caused 30 year fixed mortgage rates to rise to their highest levels of 2015.
In February, MBS lost an incredible -160 basis points from January’s close which drove up interest rates. And so far in March we are down an additional -131 basis points.
The U.S. Economic data continues to show growth with very strong readings in both ISM Manufacturing and ISM Services but the big market mover was the much anticipated jobs report on Friday.
February Non-Farm Payrolls surprised to the upside (295K vs estimates of 240K). January was revised downward from 257K to 239K but the three month average (net of revisions to all prior months) is a very robust 288K. This is certainly negative for rates as growth in the labor sector is a key precursor to the Federal Reserve raising rates.
Unemployment Rate: Dropped from 5.6% to 5.5%. Coincidentally (not) the Participation Rate fell from 62.9% to 62.8%….that explains the drop in the useless Unemployment Rate.
Hourly Earnings: Did rise again. This time just 0.1%….but it did rise. And the prior month (January) was reaffirmed at 0.5%…so that number was not a fluke. So..what we have is two straight months of wage gains. And while February was not a big spike like January, this reading, coupled with other data recently reported (like Thursday’s spike in Unit Labor Costs), has long-bond traders thinking that the ‘Data Dependent’ Fed may have enough momentum in the labor market to start to tighten rates in June.
What’s on the agenda for this week?
The week started off with MBS improving from Friday’s close and initially it may appear to be a technical bounce due to Friday being oversold, but that is simply not the case. This is not a technical bounce as you will find out by reading below.
Across the Pond:
ECB Bond buying has started: Let it begin. The European Central Bank has started to purchase bonds as part of their long overdue QE. The result? Sliding yields across the board, which has led foreign investors to seek the safe-haven of our bonds and this is helping pricing today.
Greece is the word: The French Finance Minister sees “No risk of Greek default.” Wow..thanks France..I guess Greece is fixed then. Nope..the market simply sees it differently as fear over a Greek default has actually elevated and is another reason why MBS are up this morning in early trading.
As of now there really isn’t any domestic data or news that is influencing MBS trades but there are several events to monitor this week. There are both Wholesale and Business Inventories which is older data from January but it will help to round out economist’s predictions for the very closely watched 1st quarter GDP. The biggest singular event this week will be Thursday’s Retail Sales report which for the past two months has failed to produce a meaningful increase due to cheap prices at the pump. If we finally see a nice pick up in Retail Sales, MBS could be under pressure later in the week.
There are a couple of Treasury auctions this week:
03/10 3 year note
03/11 10 year note (R)
03/12 30 year bond (R)
None of these auctions is likely to provide any real momentum in MBS trades.