What Happened Last Week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) gained +54 basis points (BPS) from last Friday’s close, which caused fixed mortgage rates to improve very slightly on a week-over-week basis.
But, for the second straight month, MBS prices ended again on a down note as mortgage rates have very slowly and steadily increased in April and May.
As usual, there was another mixed bag of economic data last week.
On the housing front, it looked very good as every economic release showed better than expected results. Case Shiller showed that home prices improved more than expected (5.0% vs estimates of 4.6%), New Home Sales were better (517K vs estimates of 510K) and Pending Home Sales were more than three times higher than market expectations (3.4% vs estimates of 1.0%). This clearly shows that the very small uptick in mortgage rates is more than offset by an improving labor market.
There were a couple of consumer readings that showed improvement. Consumer Confidence was brighter than expected (95.4 vs estimates of 94.0) and the Consumer Sentiment Index reversed the slide from the previous month for a nice gain (90.7 vs estimates of 89.0).
But it was a mixed bag on the manufacturing side. There was some improvement in Durable Goods Orders (for example, Transportation) with a better than expected gain of 0.5%. However, the Chicago PMI showed contraction (46.2) and was a very disappointing reading.
The spotlight was on Friday’s GDP report. The first revision to the 1st quarter GDP brought the number down from +0.2% to -0.7%. The market was expecting a downward revision in the -0.7% to 1.0% range with the majority expecting a reading of -.08%. This reading will be revised one more time. Historically you would expected MBS to rally on a negative GDP reading. And while MBS did improve a smidge…it wasn’t a rally. Why? First, this downward revision was actually on the lighter side of expectations. Secondly, this is OLD data, we are only one month away from the 3rd quarter. And finally, St. Louis Fed President James Bullard said it best that morning…that the first quarter of 2014 was actually much worse and the Fed ended up seeing a very strong economy in the second half of that year. The Fed expects to “power through” the weak first quarter of 2015 as well and sees strong growth for the second half of the year again.
What’s on the Agenda for This Week?
Friday’s wage inflation report could set the tone for the rest of the month. It seems unlikely that it will be lighter than expected given the recent data…and you would need it to be weaker than expected for a real trend reversal. The Non-Farm Payroll number is not so much an issue as long as it comes in above 200K.
The domestic market is focused on Jobs, Jobs, Jobs. There are several big name reports that will contain labor data such as ADP private payrolls, but it’s the Non-Farm Payroll data on Friday that will determine the direction of rates this month. Greece is front and center as three separate payments are due during the month of June and their June 5th deadline for reaching a new agreement with mommy and daddy to get more allowance is fast approaching.
This Morning’s Data
Personal Income and Outlays: Personal Spending was flat with a reading of 0.0%. We would have seen an increase of 0.1% if the prior month wasn’t improved from 0.4% to 0.5%. Personal Income improved by 0.4% vs estimates of 0.3% while core PCE was 0.1% vs estimates of 0.2%. So, this shows little to no inflationary data if you are looking at PCE. But this week is all about labor and the uptick in Personal Income, which may lead to wage growth on Friday.
ISM Manufacturing: Chicago’s PMI showed contraction but that’s not the case on a national level as ISM Manufacturing showed expansion with a reading of 52.8 in May; this was stronger than the consensus estimates of 51.9. But since this week is all about jobs…traders are noticing that the Employment component of this report cruised back above 50 with a reading of 51.7 which is a 3.4 point gain. This is negative for pricing.
Construction Spending. April’s reading was much stronger than expected (2.2% vs estimates of only 0.8%) and March’s reading was improved significantly from the originally reported -0.6% all the way up to +0.5% – that is a big swing.
06/01 – Boston Fed President, Eric Rosengren, Vice Chair Federal Reserve Stanly Fischer
06/03 – Chicago Fed President, Charles Evans, St Louis Fed President James Bullard
06/04 – Fed Reserve Governor Daniel Tarullo
06/05 – New York Fed President William Dudley