What Happened Last Week?
Mortgage backed securities (MBS) lost 29 basis points (BPS) from Wednesday’s close which caused pricing to move sideways. MBS are effectively moving sideways and in a very narrow range as the market is on hold until there is some real news out of the IMF/ECB/Germany about the progress of a deal with Greece. News out of Greece is being discounted as malarkey…it’s only news out of the people with the money that is moving markets at this point.
Jobs and Inflation: There were several different reports today but they all mesh into the two categories that the “data dependent” Fed is very focused on. We continue to see very low readings in the Initial Weekly Jobless Claims data with a reading of 271K, which matched expectations; and the more closely watched 4 week moving average declined 3,250 to 273,750. So, the trend line is below 280K which is very “rosy” for the labor market. Personal Income increased again, this time 0.5% which beat the market expectations of 0.4%, plus the prior month was revised upward. So…we are seeing fewer jobs lost and a pick-up in income/wages. This is the very definition of a reduction in “labor slack” that Janet Yellen has been watching very closely. Overall, this is negative for pricing.
Personal Spending: This has been the “missing piece” as there has been a steady increase in the savings rate as wages have been rising but spending has not. The magical and massive spending that was supposed to happen as a result of the savings at the gas pump has never really materialized. But we might be seeing it now as Personal Spending spiked by the most in almost 6 years, coming in at 0.9% and beating forecasts of 0.7%. The prior month was revised upward slightly as well. Overall, this is negative for pricing.
Inflation? Well, of course an increase in income/wages is one form of inflation. But there is also PCE today, and on a month-over-month basis it matched market expectations of 0.3% and the core reading also matched expectations of 0.1%. The year-over-year core PCE was 1.2% which is what the market expected. Even though this is well below the mythical (yes it is mythical) 2% trigger rate that the Fed is supposedly looking for, this does not prevent the Fed from raising rates at its September meeting. Janet Yellen and crew have been very specific that they will rely on their internal models for FUTURE trends towards that 2% mark.
7-Year Auction: This is the most important auction of the week. $29 billion went off at 2.153% with a bid-to-cover ratio of 2.38 vs the last auction of 2.49. The interest rate that we had to pay to borrow on a 7-year term spiked up from 1.888% during the last 7-year auction in May up to 2.153% today. So…we have higher rates and lower demand. This is a soft auction although we did see the biggest demand by foreign central banks since 2010.
Greece is the Word: So…what kind of progress did we get today? Well according to one EU finance minister, Greece has gone “backward.” While there were plenty of conflicting headlines all day, no official deal was reached and as result, the bond markets moved sideways.
What’s on the Agenda for this Week?
MBS should move off of the bottom that we saw on Friday and on June 10th which are the lowest prices paid of 2015. So the downside from Friday’s close is very limited. Concern over Greece exiting the Eurozone or at least defaulting and staying in the Eurozone will provide a very small lift to MBS pricing but will not provide a reversal to our overall secular trend of bond traders exiting the low return safety of long bonds to seek some higher returns.
Let’s put that little “Greek thing” on the back burner for a second and discuss our domestic calendar.
This is a holiday-shortened week with the bond market closed on Friday. And that means “Jobs Friday” is now “Jobs Thursday” as we get a slew of labor data this week including: Challenger Job Cuts, ADP Private Payrolls, Weekly Jobless Claims, Non-Farm Payrolls (NFP), the Unemployment Rate and Average Hourly Earnings.
Thursday’s NFP is expected to once again stay above 200K and Average Hourly Wages are expected to tick up another 0.2% on top of last month’s gains. If that ends up being the case, it simply gives the Fed more “data” to support raising rates in September and so bond traders will be paying very close attention to this data.
There is also a lot of manufacturing data that will give a good read on how 1/3 of our economy is doing with the release of Chicago PMI, ISM Manufacturing and Factory Orders. Of the three reports, ISM will get the most weight.
Now let’s get back around to Greece that has been driving the long bond market.
Greece is the Word: Over the weekend, the ECB has finally cut off the ELA, which was pumping cash into the Greek banking system even though Greece was not paying its bills. That action has caused Greece to enact strict capital controls which it is spinning as a “Bank Holiday.” So, citizens can take out a maximum 60 euros per day until the holiday ends (which is set to last at least a week).
The next real movement will come on Sunday as Greece has set a referendum vote which is required for Greece to even accept the terms of a bailout from their creditors.
Afternoon Market Update
The week started on an upswing and even though it is up, last week’s net loss of 121 BPS has still not been recouped.
All Greece…All the Time: According to a headline in the Wall Street Journal, a Greek “official” made it official that Greece would default to the IMF in less than 24 hours. MBS shot up right out of the gate in reaction to the ECB’s action over the weekend where they finally stopped giving the Greek banks access to their ELA back stop (effectively providing depositors with cash to withdraw…that the banks didn’t have). As a result, Greece has a “bank holiday” in effect witch strict capital controls that (among other things) allows a Greek citizen only tap into 60 Euros a day from an ATM.
Okay, so all this is going on. What does it mean?
Well…first of all it’s giving a LITTLE lift to MBS prices. If this was 2 years ago, it would have given a big boost to your back end pricing…but not now. That is because the smart money has been getting out of the Greek play for some time; in fact, other than the ECB, there has been very little bond auction in Greece. Long bond traders recognize that the Eurozone will not collapse like a domino and Greece may even stay in the Euro, just be in default. With their GDP accounting for less than zero (yes it is negative) towards the larger GDP levels of the collective Eurozone, Greece’s implosion is not the scary event that it once was. Still, there is plenty of drama and their exit cannot be completely discounted and will cause some very short-term volatility across all financial markets.
But wait…there is another “fly in the ointment”:
Puerto Rico: Is getting lots of headlines as two of the major rating agencies have downgraded the country (yet again). Now this might be news to you…BUT this is not to anyone in the bond market. Many had pegged Puerto Rico to go under before Detroit went bankrupt. How they have been able to shuffle paper and stay in the game this long is a miracle. They have no way to payback their debt. You can write them off. But just like Cyprus, they won’t have any impact on long bond yields.
Some Domestic Data
May Pending Home Sales: Hit their highest level since April 2006 and have increased by 10.4% on a year-over-year basis…not bad at all considering these contracts were all written during a period of slightly higher rates from April. The bond market had no reaction to this as its all Greece.
Tomorrow: Will be the very important Chicago PMI and Consumer Confidence. There will also be the Case-Shiller Home Prices Index.