What Happened Last Week?
Mortgage backed securities (MBS) lost 26 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher.
We had a wild ride in our stock market (as measured by the Dow) with huge daily swings, yet MBS pricing were largely insulated from the swing in stocks as long bond traders and short term stock traders had very different outlooks on economic and geopolitical events and their potential impact on future growth and Fed action.
In 2 of the 5 trading sessions, both stocks and bonds moved in the same direction (historically they have an inverse relationship). What is really interesting are days like Monday where there was a giant -588 point sell-off in the stock market yet benchmark MBS only moved 12 BPS (which is statistically insignificant) on a daily basis. August 26 makes more sense with a +609 rally in the stock market and a -33BPS sell-off in the bond market. However, under “normal” circumstances that would be a -200 BPS sell-off instead of only -33BPS in MBS. And then on Thursday there was a giant +369 rally in the stock market and MBS also improved. Again, “normally” you would expect a big -100 or -200 BPS sell-off in MBS.
As far as domestic economic data is concerned, overall it was much stronger than anticipated by economists, analysts and traders:
Consumer Confidence was very robust coming it at a blistering 101.5 which is almost unheard of and handily beat forecasts of only 92.6.
Durable Good Orders was +2.0% and much, much stronger than forecasts of -0.8%.
2nd Quarter GDP got its first revision to data and it trumped all estimates, hitting 3.7% which was much higher than market estimates of 3.7%.
But much of the spotlight was on the Jackson Hole, WY Symposium that is put on every year by the Federal Reserve Bank of Kansas City and attended by all the major Central Bankers in the world. There were comments and speeches by several Federal Reserve Bank presidents on Friday, and their comments ranged from “let’s raise rates already” to “we need to wait until 2016” and as a result, the bond market is still trying to hedge the probability of a Fed rate hike in September, October or December.
What’s on the Agenda for this Week?
This week will get a lot of traction with all of the jobs and manufacturing data. The bond market will focus mostly on the scope of wage inflation as the sheer number of jobs is already enough for the Fed to raise rates (they have acknowledged that). It will take an extremely weak NFP report on Friday to break above it.
This week is chock-full of very important and heady economic reports with Friday’s Jobs Data as the focal point as it is the last big Non-Farm Payroll report before the September meeting.
Jobs, Jobs, Jobs: We will get a slew of jobs related data, including ADP Private Payrolls, Unit Labor Costs, Challenger Job Cuts, Weekly Jobless Claims, Unemployment Rate, Non-Farm Payrolls, Average Hourly earnings and more! Plus there are key internal components in ISM Manufacturing and Services that will address employment as well. While the markets will react to this data based upon their perception of how it will impact the Fed’s timing, the reality is that the jobs data has already been strong enough to justify a rate hike. It would take a very, very weak NFP report to change that. It’s not the jobs data, it’s the low inflation data that is holding off the Fed.
Manufacturing: There will be a big set of data with Chicago PMI, ISM, Factory Orders, and more. The market is expecting small to moderate growth in these readings.
The Talking Fed: There was a huge dose of the “The Talking Fed” last week and this week will be more as the market reacts to a speech over the weekend and more speeches this week:
09/01 – Boston Fed President Rosengren
09/03 – Minneapolis Fed President Kocherlakota
09/04 – Richmond Fed President Lacker
Across the Pond
Weakness and volatility out of China: This is almost now the new norm and while it certainly can have a dramatic impact on the markets, the “shock” of it all is no longer a danger as the market now “gets” that growth is much slower than expected and that their currency and stock market are essentially going to be a problem for a long time and therefore it’s not going to catch many long bond traders by surprise. It will continue to provide very good support for pricing within a relative range but the potential for it to be a catalyst for true upward momentum will be very difficult.
The Technicals: How will this week play out? Over the past 4 weeks, MBS have sold off 3 out of the last 4 weeks. While they are certainly trading at levels that are better from the lows in June, we are not in a bullish market as MBS have sold off each time they have tried to hit elevated levels. It is interesting that some loan officers say that pricing keeps getting better…while MBS are really moving in a relatively tight range and there has been only one week of positive pricing movement out of the past.
It’s the last trading day of the month and MBS continue to be trapped in a well-defined short term channel. Both the top and the bottom of the channel were tested today which has more to do with technical buying and selling within a very narrow range than any particular market event.
Chicago PMI: The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction. Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month. Still, any reading above 50 is expansionary and therefore generally negative for MBS. In this case, MBS treaded water for 15 minutes and then sold off slightly.
Dallas Fed: Their manufacturing survey was much weaker than expected (-15.8 in August vs -4.6 for July). Certainly a dismal report but the energy sector is a huge factor in that region and the recent downturn in oil prices is crushing the local economy. This is a low level report.
Black Gold: Oil prices surged nearly 9 percent Monday, capping a three-day rally that added over 27 percent to the commodity’s price, after U.S. oil production data showed output falling and OPEC said it would talk with other producers about low prices. This is negative for pricing as it could move inflation off of uber lows. And has bond traders talking about Fed time as Fischer said his level of confidence is “pretty high” that U.S. inflation will return to the Fed’s target, as factors like oil’s low price are transitory.
The Talking Fed: On Saturday, the Fed’s Vice Chair Stanley Fischer appeared to the leave the door open for a September rate hike. Maybe not that it would happen but that it hasn’t been ruled out completely. He said, “At this moment, we are following developments in the Chinese economy and their actual and potential effects on other economies even more closely than usual.” At the same time, he highlighted that “With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.”
With MBS trading in a tight range today, these comments didn’t shake the market but clearly MBS could not make any kind of run as traders are recalibrating their bets on the first rate hike.
Tomorrow will be the first dose of jobs data as we will be focusing on the employment cost index component of the ISM Manufacturing report. There will also be Construction Spending and Total Vehicle Sales