What happened last week?
Mortgage backed securities (MBS) gained 68 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to decrease from the prior week but are still much higher than last May.
So far for the month of June, MBS have sold off 101 BPS which have caused mortgage rates to increase from May’s levels significantly.
Last week was about two key themes: Concern over Greece and the Federal Reserve. Since the Federal Reserve gave long bond traders what they expected, Greece actually had more influence on rates improving last week.
Greece is the word: MBS received some new demand which caused mortgage rates to decrease due to renewed concern that a deal would not get done between Greece and their creditors (IMF, ECB, etc.). Neither party “blinked” last week, and it will take Greece, not the ECB/IMF, to alter their position in order for a deal to be achieved. And Greece simply wasn’t making any concessions.
The Fed: The Federal Reserve gave long bond traders exactly what they expected. And that was no change in interest rates this meeting but leaving the door open for a rate hike at the September meeting. Here are some highlights:
– 15 out of 17 FOMC members see a Fed Fund rate hike this year, with the majority seeing an average of 0.625% Fed Fund rate. In order to get to that rate, there would need to be two rate hikes, assuming a minimum hike of 0.25%. Based upon the number of Fed meetings left in the year…that means that the majority of the voting members (i.e., decision makers) in the Fed are saying that there will be a rate hike in September. Now….that is what they are saying in their math. Their policy statement is a lot less direct.
– Economic activity has been expanding “moderately.”
– “The pace of job gains picked up,” it said, and “underutilization of labor resources diminished somewhat” since their last meeting in April. (This is a decent upgrade in language from their last statement.)
– “The committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.”
What’s on the agenda for this week?
While MBS improved last week, that was not a trend reversal…just an improvement during an isolated period of time. Last week saw gains not due to the Fed but due to increased fear factor and flight to safety buying of U.S. Bonds. This week, it appears that Greece has at least opened the door for real negotiations…and that will pressure pricing.
Will we finally see a deal for Greece this week? That (once again) will be the primary driving force in pricing this week.
But domestically there are some big reports that will hit, along with a big dose of short term Treasuries hitting the market.
On the housing front will be the Existing Home Sales and New Home Sales reports, which will give a good idea on how our housing market is doing. The consensus estimates are calling for some nice month-over-month gains even with rates rising.
GDP…just how bad was the first quarter? We will get the final revision to this number and it is expected to improve from -0.7% all the way up to -0.2%. It’s not likely to have a huge impact on pricing, though, as bond traders know from numerous statements from the Fed that they are overlooking that bad quarter and focusing on the economic growth over the next six months.
Personal Income and Spending will hit on Thursday. Last time around, we saw a nice pick-up in Income but Spending was flat. The market is expecting Spending to finally gain some traction with a big increase of 0.7%. We will have to see if we get it. The stronger this number is…the better it is for the economy and the worse it is for rates. The PCE readings will also get a lot of attention from traders.
Durable Goods will hit on Tuesday and while the headline number is expected to decrease by 0.5%, the core number which excludes the very volatile transportation sector (planes, cars, etc.) is expected to jump a healthy 0.6%.
Treasury auctions this week:
– 06/23 2 year note
– 06/24 5 year note
– 06/25 7 year note
Greece is the Word: MBS opened this week under pressure as traders are shifting their sentiment from last week’s “no deal will get done” to this week’s “a deal might get done.” What’s changed? Greece has. They have issued a letter stating that they are willing to increase taxes and change their retirement age…two items they previously refused to budge on.