What Happened Last Week?
Mortgage backed securities (MBS) gained +27 basis points (BPS) from Wednesday’s close which caused fixed mortgage rates to move sideways but did give a little more on the back end. They did manage to finally close back above that very stingy 200 day moving average but could not close above the important 101.00 mark. MBS are still down -30 BPS for the week.
Oil Prices and the German 10 year bund yield both increased with is negative for pricing. But there was weak manufacturing data out of China and a weaker than expected Existing Home Sales report which pushed MBS into positive territory and above the 200-day moving average (finally).
In the afternoon, MBS got the most demand as bond traders parked their funds ahead of the early closing Friday and the long holiday weekend.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims hit 274K, which was very close to the market expectations and is a 15 year low. But more importantly, the prior week’s reading of 264K was not revised upward, meaning we are seeing a string of back-to-back low readings here. The more closely watched 4-week moving average dropped to 271K. MBS were making a run at the 200-day moving average but then pulled back after the strength of this report.
Housing: Existing Home Sales for April came in at 5.04 million which was less than the estimates of 5.24M but were still above the important 5M mark. Plus, March was revised upward to be better than originally reported. Still, the bond market focused on the decrease on a MOM basis and rallied as a result.
Leading Indicators: The Conference Board’s economic indicators came in at more than twice the estimates (0.7 vs estimates of 0.3) plus the prior month was doubled from 0.2 up to 0.4. This is some pretty strong data.
Manufacturing: The Philly Fed showed manufacturing growth on a month over month basis of 6.7. But this came in a tad lighter than the projections of 8.0.
Across the Pond:
China: Had weaker than expected manufacturing data. Their PMI reading hit 49.1 which was lower than the consensus estimates of 49.3 and is the third month in a row with a contractionary reading (and reading below 50).
What’s on the Agenda for Today?
It was an early session today with the bond market closing at 2:00 EDT for Memorial Day Weekend.
Inflation: Houston…we have inflation. There is a lot of data in this morning’s CPI report. The bond market is focusing on the Average Wages component the most as it rose to 2.3% in April from 2.1% in March. The Federal Reserve is giving a lot of weight to labor slack and wage inflation data in their decision on when to start to tighten. The Headline MOM (month over month) CPI data matched expectations at 0.1% but the Core (ex food and energy) was higher than expectations with a reading of 0.3% vs estimates of 0.2%. The YOY number was at 1.8%….not far from the Fed’s 2.0% target rate. Overall, this is a negative report for long bond trades and if weren’t in a holiday shortened session today, MBS would feel more heat from this report.
Yellen is Yelling: Fed Chair Janet Yellen spoke at an economic club luncheon today. While no new policy or announcements were made, the market is paying close attention to her comments.
Across the Pond:
Grexit: Not so shockingly, there is still no deal between Greece and their creditors to unlock that last traunche of 7.2 billion euros available under the last bailout agreement. It’s comical to see how far apart the two sides are. The Greek Prime Minister met with Germany’s Merkel and France’s Hollande and failed to get any traction. After the talks broke off….the Greek Prime Minister said, “we are very close and expected a deal soon.” But Germany’s Merkel (the one with the control and the money) said that there is “a whole lot of work to do.”
Meanwhile, the German Finance Minister admitted that Greece may very well need to activate a parallel currency which is a really just a way of printing IOUs to creditors.