What Happened Last Week?
Mortgage backed securities (MBS) gained 47 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve slightly.
Rates moved sideways all week, even with a FOMC meeting and some big hitting reports. But after Friday’s Employment Cost Index, MBS rallied to their best levels in weeks which caused rates to drop.
The Employment Cost Index (ECI) rose only 0.2% in the second quarter, which is far below expectations and the lowest result in the 33-year history of the report. Year-on-year, the ECI fell to plus 2.0% from 2.6% in the first quarter. The record low for this reading is plus 1.4% back in the early recovery days of 2009. MBS moved upward in direct reaction to this release. However, it is important to note that this is OLD data that compares the change in costs from the 1st quarter to the 2nd quarter and is completely removed from our current employment situation, which we will find out more about next Friday with our NFP report.
As expected, the Federal Reserve left their key interest rate unchanged. And if you thought the Fed was on track to raise rates in September, you got a little more fuel as they pointed to improvements in the labor market and used a little rosier language than last time. They also stated that rates will rise after a little more improvement in the labor market (which makes this Friday’s Non-Farm Payroll very important) But they kept in their statement that the risks to the overall economy and labor market were “nearly balanced.” The market was waiting to see if that language would be “tweaked” from the last statement and it wasn’t. They also continued to give themselves some wiggle room on concern over low inflation. All-in-all, this was basically what the long bond market expected and as a result, mortgage rates had little to no reaction to this event.
What’s on the Agenda for this Week?
MBS have sold off.nice and steady all year long but took a pause in July. Does this mean the secular shift out of low risk, low return bonds is over? It is too early to tell on that one. There is certainly more risk in the market place than there was a month ago and bonds are responding. But now is not the time to bet on a complete rebound from that secular trend. Friday may give that last piece of data regarding the Fed’s rate hike in September. This has the makings of a very volatile week.
Jobs, Jobs, Jobs: After Friday’s low Employment Cost Index (old data), this morning’s ISM Manufacturing data gave bond traders reason to think that the data is not so old after all. While the ISM reading showed decent growth (although below forecasts) the key internal component – employment – tumbled. MBS spiked on this news this morning and sets the stage for this week’s glut of jobs data that culminates with Friday’s Non-Farm Payrolls. The key will be the Average Hourly Wages which is expected to rise 0.2% after being flat last month. The lower that number is….the better it is for rates. The higher that number is, the worse it is for rates.
There is a huge plate of economic data this week, with plenty for everyone:
– For jobs we have ADP Private Payrolls, Challenger Job Cuts, Initial Jobless Claims, Unemployment Rate and the Non-Farm Payrolls.
– For manufacturing we have ISM, Factory Orders and the Trade Balance.
– The state of the consumer will also be better known with Personal Income and Spending, Auto Sales and Consumer Credit.
Basically, by Friday the market will lock in their bets on the potential Fed rate hike in September. the probability of which (in traders’ minds) has dropped since Friday.
Afternoon Market Wrap-up
What an interesting opening to August as our first trading day had plenty of surprises. The MBS market was treading water and moving sideways until the premature release of the ISM Manufacturing data which hit the airwaves well before it was supposed to at 10:00 EDT. The combination of the weaker ISM data (and more importantly its employment component) and dropping oil prices have helped MBS make their gains today.
Personal Income was higher than expectations (0.4% vs estimates of 0.3%) and kind of goes against the wave of other reports showing that wages are lagging. But more importantly, consumers are not spending their higher earnings. Personal Spending matched expectations with a very low reading of 0.2% but May was revised lower from the blockbuster reading of 0.9% down to only 0.7%. PCE (a measure of inflation) was very tame at 0.1% but May was ratcheted up to 1.8%; that is a huge revision upward from the originally reported 0.8% and will need to be watched.
Across the Pond
Greece is the Word: Okay…so their stock market opened. And just guess what all those cash-strapped stock owners did after not being able to access ANY of their stocks for many months? Well…not so shockingly they SOLD what they could to get their hands back on some cash after having their fortunes locked away from them while the stock market was closed. Who could have seen that coming? EVERYONE!
Black Gold, Texas Tea: Oil continues to tank (WTI Crude $45.35) and believe it or not, it is a JOBS story more than it is an energy/commodity story. Why? More layoffs…and more layoffs in the oil and supporting industries in big-time numbers, and they are all high-paying jobs. Will this show up in Friday’s jobs data?
Tomorrow will only have Factory Orders; it’s a fairly light day for economic data.