What Happened Last Week?
Mortgage backed securities (MBS) gained just 4 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways.
There was a lot of volatility last week with a big swing in pricing. The spread between intra-day high and intra-day low for the week was -107 basis points.
International events were the primary factor in trades for the week as concern over a collapsing Chinese stock market and a Greek referendum vote to not accept the bailout terms from the Troika caused a big spike in demand for all U.S.-based long bonds and directly drove up MBS pricing to give the best rates of the week on Tuesday and Wednesday.
But as fear over those two events started to abate, MBS sold back off and the week ended up right back where it started.
Even though international events drove our markets, we still had a lot of domestic data hit:
The “Talking Fed”: Both the minutes of the last FOMC meeting and Janet Yellen’s speech in Cleveland on Friday show that there have been big strides in our economy but the Fed feels that there is still a little more growth needed before they start to raise interest rates. Still, Janet Yellen (and 15 out of the 17 Fed voting members) made it clear that we should expect at least one rate hike this year.
ISM Services: This report represents 2/3 of our economy and it was a very strong report – coming in at 56.0 which was a small improvement over May’s data. Considering anything over 50 is expansionary…a reading of 56 is very good.
Wholesale Inventories: Were more than double the market expectations (0.8% vs estimates of 0.3%). This is older data from May but this strong reading will cause many economists to upgrade their projections for the 2nd quarter GDP.
Treasury Auctions: It was the tale of two auctions as we saw very strong demand for the 10-year note (which helped to briefly lower mortgage rates) but there was much weaker demand for the 30-year bond auction (which helped to increase mortgage rates).
What’s on the Agenda for this Week?
Pricing is expected to be worse today than Friday but we may pick up a few BPS from early morning lows. It is important to note that MBS have not yet fully adjusted for the Greek deal as the Greek deal is still “up in the air” until Wednesday’s vote in Greece. IF it passes, THEN MBS will sell off another 50 BPS. Things look dicey and very volatile.
Greece is the Word
We have a “deal” between Greece and the Troika…or do we? After much turmoil over the weekend, the bottom line is that today opened with news that the Eurozone leaders unanimously reached an agreement with Greece. But hold your horses. The new bailout package is actually worse than the one the Greek’s voted “no” to last week. Also, it’s not over. The Eurozone leaders are requiring that this bailout agreement and new laws be passed by the Greek parliament by Wednesday. And that is the sticking point as members of the Greek Prime Minister’s own political party are saying that they won’t support this deal.
Meanwhile, the Greek banks are still on “holiday” as the ECB will not allow Greece to tap into the ELA for more cash for their banks until Greece gets this deal through parliament on Wednesday.
Yellen is Yelling: The markets will be paying very close attention to Fed Chair Janet Yellen’s semi-annual monetary report. She will address the House on Wednesday and the Senate on Thursday. We are looking for more guidance on the timing and trajectory of rate hikes, particularly in light of the Greek deal which many thought would postpone the Fed raising rates.
Retail Sales: This is the most important data point of the week. We got a big surprise to the upside with May’s reading, will June’s follow? The market is expecting a headline reading of 0.3%. But there have been some very strong Consumer Sentiment readings that may play into stronger spending. The higher this number is, the worse it is for rates.
Inflation: Two reports will address inflation this week. The Producer Price Index (estimated 0.3%) and the Consumer Price Index (estimated 0.3%) will both hit. Both are expected to show mild inflationary pressures.
Manufacturing: There will be several regional reports, including NY (Empire Mfg), Philly Fed, as well as Industrial Production and Capacity Utilization.
Housing: We get both New Housing Starts and Building Permits. Both have been trending about 1 million units but have yet to take off.
Groomerang (Greek Boomerang): The Groomerang has provided all of the volatility today. While the Eurozone leadership and the Greek Prime Minister had “an agreement in principal,” Greece would still have to get it through their parliament. Regardless, MBS sold off in the morning, but reversed course as the market wised up to the shrinking probability that the Greek Prime Minister could get this through on Wednesday.
After around noon EDT, MBS started to claw their way back as the following headlines made bond traders second guess if this deal would hold:
– Tspiras only has a 12 vote majority in parliament and the leftist party has said that all their votes will go to block this deal. That means that his majority is now non-existent and he must get votes from other parties in order to get it through.
– Greece failed to get bridge financing (but this was expected).
– Finland (you know that mega powerhouse Finland?) said that they cannot support the new loans for Greece.
Well now that the smoke has cleared…it simply means that we are basically trading in the same long term range…meaning this: IF Greece does pull off a miracle and gets this through parliament on Wednesday, MBS will sell off. IF it is kaput on Wednesday, then MBS simply move back towards last week’s pricing levels between the 25 day and 50 day moving averages.
Tomorrow will be the biggest domestic report of the week: Retail Sales. Anything over +0.5% will be negative for pricing. It will basically take a reading below zero for MBS to rally. There will also be the small business optimism index, Import Prices and Business Inventories.