What Happened Last Week?
Mortgage backed securities (MBS) gained 16 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways as we traded in a very narrow range.
The focus was squarely on Friday’s jobs data (and its potential impact on future Fed rate hike decisions) but there were a lot of big name economic reports released as well.
On the manufacturing front, there was very clear expansion with both Chicago PMI (a regional report) and ISM Manufacturing (a national report) had readings above 50 but both were a little below market expectations.
Construction Spending was very strong with a reading of 0.7% which was more than double the consensus estimates.
Factory Orders grew 0.4% but that was a much slower pace than the previous reading of 1.8%.
Non-Farm Productivity was much stronger than expected with a reading of 3.3% vs est of 2.7%. The
ISM Services Index (which represents 2/3 of our economy) was very robust with a reading of 59.0 and was stronger than expectation. So you can see, the data shows overall economic growth with some strong areas but also some slow-growth areas.
Jobs, Jobs, Jobs: Friday’s release was a strong report. Not a blockbuster but it was a strong report and certainly solidifies any justification that the Fed needed to raise rates. However, their decision on timing also has to consider inflation and global weakness (but it’s not supposed to). The NFP for August was lighter than expected, but July was revised upward significantly and the market understands that August will be revised two more times before the final reading…so it’s not really a big deal. The 3-month moving average of NFP is 221K which is a great level. Average Hourly Wages both on a month-over-month and year-over-year basis show definitively that there is wage pressure and therefore wage inflation and is generally negative for mortgage rates.
Here is the tale of the tape:
Non-Farm Payrolls (NFP) August: 173K vs estimates of 217K to 220K
Prior Revisions: July from 215K all the way up to 245K
Unemployment Rate: Dropped down to 5.1% vs estimates of 5.2%
Participation Rate: Remained unchanged at 62.6%
Average Hourly Wages(MOM): Were higher than expected 0.3% vs estimates of 0.2%
Average Hourly Wages (YOY): Has now increased to 2.2%
What’s on the Agenda for this Week?
MBS are under pressure as traders take their “parked” money out of long bonds and put it back to work in the market, effectively wiping out all of last week’s small 16BPS gains. This will continue UNTIL long bond traders either 1) put more weight on the probability of a rate hike next week – or 2) put less weight on a rate hike in December which could pop MBS above the current channel. The economic data on an intra-day basis can only bounce MBS around this channel.
Treasury Auctions This Week
09/08 – 3 year note
09/09 – 10 year note
09/10 – 30 year bond
Small Business Optimism: The National Federation of Independent Business said on Tuesday its Small Business Optimism Index gained half a point to 95.9 last month (vs estimates of 96.0) suggesting the economy continued to grow at a steady clip halfway through the third quarter.
Labor Market Conditions Index: August’s reading was higher than expected (2.1 vs estimates of 1.3) and July was revised upward significantly (1.1 to 1.8).This index is based on a broad set of 19 components and could be sighted by the hawks as evidence of labor market improvement at next week’s FOMC.
The Talking Fed: The week started off with comments from the San Francisco Fed President John Williams. And he gave the market both dovish and hawkish guidance stating that the economy is ready for a rate hike this year but now there are substantial head winds from overseas (China). He wouldn’t say if a rate hike would come in September and left the door open for the Fed to hike or wait….nothing new.
Across the Pond
China: Had a very poor trade data report and initially their stock market tanked but then miraculously rebounded into positive territory. Why? Well, it appears that government sponsored entities have jumped in and purchased stocks to pick up the slack. Problem solved.
Europe: The 2nd quarter GDP was a little stronger than expected (0.4% vs estimates of 0.5%) plus the 1st quarter was revised upward to 0.5% according to Eurostat. YOY, Europe’s GDP rose 1.5% which was much stronger than forecasts of only 1.2%.
Once again….HUGE move in the stock market and a minimal move in MBS. The market was back in full stride today after the long Labor Day weekend.
MBS lost 22 BPS within the first few ticks as traders removed their cash that was temporarily parked in the safety of bonds over the long weekend and put it back into play and provided plenty of fuel for the stock market. Our own domestic data was generally negative for pricing but not by enough to break us out of our channel.
Treasury Auction: Results were mixed to average for the monthly 3-year Treasury auction where coverage came in at 3.23 vs a year-to-date average of 3.29. The high yield of 1.056 percent is right at expectations but the dealer takedown, at 41 percent of the $24 billion offering, points to less-than-aggressive bidding from buy-and-hold accounts. This is too short of a term to impact pricing, as you see by our line chart – this had no impact.
Consumer Credit: Not all debt is bad debt…at as far as traders are concerned as higher revolving balances equates to more consumer spending. Consumer Credit rose $19.1 billion in July. Revolving credit, where credit cards are tracked, rose $4.3 billion for a fifth straight gain and the best run of the recovery. Non-revolving credit rose $14.8 billion reflecting strength for vehicle sales and also student loans which are tracked in this component.
The Talking Fed: We start the week off digesting comments from the San Francisco Fed President John Williams. And he gave the market both dovish and hawkish guidance stating that the economy is ready for a rate hike this year but now there are substantial head winds from overseas (China). He wouldn’t say if a rate hike would come in September and left the door open for the Fed to hike or wait….nothing new.
Tomorrow will be a very important 10 year Treasury note auction, and the JOLTS report.