Weekly Mortgage Overview: 6/8/2015

What Happened Last Week?

The 3.50 FNMA Mortgage backed securities (MBS) coupon lost 161 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to rise to their highest levels of 2015 (so far). The FNMA 3.0 MBS coupon (the benchmark for the year until last week) dropped 202 BPS for the week.

So what’s going on? Why are rates rising? Last week saw constant pressure on MBS as part of a secular trend. German bund yields rose and MBS sold off as major bond traders continued to move money out of low return (but very safe) bonds. Hedge funds are done with camping money in bonds for the past two years in exchange for safety. They are seeking actual profits now and leaving the safety of U.S. bonds…it’s risk on!

The biggest domestic story of the week was Jobs, Jobs, Jobs, as the bond market knows that the Fed is paying very close attention to wage inflation. And there were certainly several different reports that showed a tightening of labor slack in our economy. Personal Income increased by 0.4%; the ISM Manufacturing Index showed a big increase in their employment index; ADP Private Payrolls were stronger than expected with a 201K reading; and the number of announced corporate job cuts plummeted from 61.5K down to only 41K in the Challenger Job Cuts report. Non-Farm Productivity tanked due to Unit Labor Costs that shot up 6.7%.

And then there were Friday’s jobs reports where across the board, this report showed strength in the labor market and gave MBS every reason to sell off even more. The May NFP was higher than expected (280K vs estimates of 220K), plus the last two months saw upward revisions of 32K which is also very important.

The Unemployment Rate ticked upward from 5.4% to 5.5% but that is a good thing as it was artificially too low due to a skewed and an all-time low participation rate. With more legitimate humans seeking employment, it causes the Unemployment Rate to increase until they find a job.

But the REAL STORY was the Average Hourly Earnings which were three times higher than in April and beat market expectations (0.3% vs estimates of 0.2%). This is the KEY to the Fed’s timing of their first rate hike, as Janet Yellen has been very clear that wage inflation is more important to her than commodity inflation.

What’s on the Agenda for This Week?

The biggest report of the week may be the May Retail Sales report which is expected to tick up a robust 1.1% after being flat in April. It will be interesting to see how it plays out given the rise in the personal savings rate last week.

There will also be a couple of inflationary related reports, and what is interesting is that for the first time in a very long time, the market is expecting some monthly increases in inflation. Import Prices are expected to move from April’s -0.3% all the way up to +0.9% in May. And the headline PPI number is expected to flip from -0.4% in April up to +0.4% in May. Rising inflation levels (which we have not seen for over a year) would be another piece of pressure for MBS.

We have a big supply of U.S. debt to absorb this week:
06/09 3 year note
06/10 10 year note
06/11 30 year bond

The overall bond market will continue to pay a lot of attention to events overseas. The G7 meeting is underway in Germany and of course the Greek drama continues as their newest target date is June 14th. But everyone in the market expects this to drag on until the end of June when Greece has three payments due all at once.