What Happened Last Week?
Mortgage backed securities (MBS) lost 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways on a very “choppy week” that saw a spread of -94 BPS from intra-day highs to the intra-day low.
There were several very key reports last week and while Friday’s jobs data was the most important data series of the week, it was really just a proxy for long bond traders to gauge when the Fed may begin to tighten their key interest rate. And when the smoke cleared, last week’s data did little to change anyone’s mind about the timing of the first rate hike. The majority of bond traders currently have that pegged to the September FOMC meeting.
Well…the biggest Jobs Friday of the century came and went and while MBS made some very small gains after the report, the Jobs data simply wasn’t strong enough nor weak enough to really change anyone’s minds on when the first rate hike might occur. As a result, MBS drifted higher but were unable to challenge last Friday’s highs that occurred after the weak Employment Cost Index report and simply could not mount any type of rally to the 100 day moving average.
Domestic Flavor
Jobs, Jobs, Jobs: Lets break-down the big jobs data Friday:
– Non-Farm Payrolls: 215K vs estimates of 220K
– Impact on MBS: Neutral, right in the wheel house of expectations
– Prior Revisions to Non-Farm Payrolls: +14K
(Impact on MBS: Neutral to slightly negative as this was stronger employment data than originally reported.)
– Unemployment Rate: 5.3% vs estimates of 5.3%
(Impact on MBS: Neutral)
– Average Hourly Wages: 0.2% vs estimates of 0.2%
(Impact on MBS: Neutral to slightly negative as the bond market was slightly hedged that this would be much lower than expected.)
Other Notes: Manufacturing Payrolls hit their biggest increase since January, so a nice bright spot there. But lumber and energy jobs tanked (thanks to very low oil prices). The 3 month NFP average is now 235K and the average for the year is 211K both are very strong. So, decent numbers and trending there although these are not looking like high paying jobs. Year-over-Year Average Hourly Wages are now up 2.1% which is a nice clip. The Participation Rate was dismal but has not fallen further..still very disappointing though.
Bottom line: The market needed a much weaker report to assume that the Fed will wait longer to start to raise rates. We didn’t get that miss.
The Talking Fed: Atlanta Fed President Dennis Lockhart reaffirmed the Fed’s very transparent stance that a rate hike is coming soon. The markets keep shrugging off the Fed’s guidance due to economic releases and assuming the Fed will have to change course. But comments like these from Lockhart (in the WSJ) put that rate hike back on the table in the minds of many bond traders. He said that the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September.
What’s on the Agenda for this Week?
Today’s comments by both talking feds have pressured MBS. Expect the last trade of this week to be lower (worse pricing) than the first trade of the week.
This is another big week for economic data and auctions, but it may be overseas events that give MBS the most momentum this week.
The Big 3: Here are the three biggest domestic events of the week. There are other very important releases but these have the potential to have the greatest direct impact on MBS specifically.
1. Retail Sales. Doesn’t get much bigger than that. The market is expecting a turnaround from June to July, flipping from -0.3% to +0.5%. The higher this number is, the worse it is for pricing.
2. JOLTS. This has taken on a bigger role lately as Yellen and crew are focused on labor slack (or lack thereof).
3. 30 year Treasury Bond auction.
Treasury auctions this week:
08/11 3 year note
08/12 10 year note
08/13 30 year bond
Taking feds this week:
08/10 – Fischer, Lockhart
08/12 – Dudley
This morning Alan Greenspan made some interesting comments on Bloomberg TV. He said that he saw the signs of the last bond bubble before it hit but missed the timing of when it would hit. Now, he says he sees those signs of a bond bubble again. Also, the Fed Vice Chair Stanley Fischer said that low commodity prices (and therefore low inflation) is only temporary and has to deal with the price of oil which cannot stay low forever. He also said the economy has nearly achieved full employment.
Across the Pond:
Greece is the Word: Negotiations are still going on. But there is actual movement as Greece scrambles to get this deal done before August 20th. The biggest new movement in talks is that Germany (and EVERYTHING hinges on Germany) is now open to aid provided that Greece follow “strict” conditions in carrying out reforms in order to receive each new tranche of funding. The market, as a whole, has been very skeptical that anything will get done, so if that sentiment changes, then MBS will sell off.
China: Their stock market surged even though they had more weak economic data. Why? Because of speculation that this poor economic data will force more stimulus from the PBOC.
Market Wrap-up
The stock market (DJIA +241.79) had a major rally upward.
The powerful combination of three Fed heavy weights’ comments pushed MBS lower and kept it there. As of this writing there was still an hour to trade, but if the close is below that important technical indicator, there could be more selling off tomorrow.
Jobs, Jobs, Jobs: There was one lower-level jobs report issued by the Fed’s research department called the Labor Market Conditions Index (LMCI) based on 19 labor market indicators. The July reading was 1.1 which was a little lighter than market expectations of 1.3; however, June was ramped up from an originally reported 0.8 all the way up to 1.4. So…more strength in the 2nd quarter than originally thought. MBS didn’t have a major reaction to this data…there was plenty of jobs data on Friday and this did not paint any different picture.
Tomorrow will be Small Business Optimism, Productivity and Unit Labor Costs, Wholesale Inventories and the first of three Treasury auctions.