What Happened Last Week?
Mortgage backed securities (MBS) gained 81 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
Last week was all about the jobs data and its potential impact on the Fed’s timing for their first rate hike. The jobs data was much weaker than the market expected and caused MBS to have a huge rally which led to our lowest mortgage rates in months.
Jobs, Jobs, Jobs? Here is the tale of the tape:
Non-Farm Payroll: The bond market pays close attention to the current reading, but we know and understand that the prior months are significantly revised two more times after they are originally released. So, those revisions also get a lot of attention.
September: 142K vs estimates of 205K. This is a big disappointment and it is generally believed that it would take a reading below 150K to get a rally.
August: Revised lower from 173K down to 136K. This was maybe more important than the September reading. The September reading will be revised two more times. But historically the August data is revised upward an average of 40K. So, the bond market was expecting that August reading of 173K to be upgraded to over 200K and we didn’t get that. This was very positive for pricing as now both August and September are below 150K after trending for over a year at over 200K per month.
July: Was revised lower from 245K down to 223K.
Average Hourly Wages: Were flat at 0.0% on a month-over-month basis vs. expectations of a gain of 0.2%. And we can see why when the Average Hourly Work Week (which hardly ever moves) dropped from 34.6 hours per week down to 34.5 hours per week. So, less time working means no upward pressure on wages. Still, the year-over-year reading remained at 2.2% which is strong. Regardless, the MOM reading is positive for pricing.
Unemployment Rate: Remained at 5.1% which is what the market expected. The participation rate currently has more impact on the outcome of the Unemployment Rate formula than people going back to work does. The Participation Rate was at 62.4%, a drop from August’s 62.6%. The Unemployment Rate of 5.1% is still an attractive number (if you can believe its validity) for the Federal Reserve and is the lone bright spot of today’s data.
What’s on the Agenda for this Week?
This week sees an elevated near term channel that will keep pricing at better levels than where they were two weeks ago. However, Friday’s large pull back (lost 25 out of the 50 basis point gain after the NFP) shows that even better rates over Friday’s close will be very hard to come by.
These three items are the most important (scheduled) events this week and have the greatest potential to impact pricing:
ISM Services: Unlike the ISM Manufacturing report that showed only modest growth last week, this report represents 2/3 of our economy. The market is expecting a very strong reading near 58. The non-manufacturing sector has been very strong this year.
30 year Treasury Bond: While the 10 year note will also be closely watched, the 30 year can have a much greater impact on pricing.
FOMC Minutes: Normally, this is released on a Wednesday but this time it hits on a Thursday. The FOMC surprised many by backing off of a rate hike. Since then, most voting members (including Yellen) still say a rate hike could be possible this year, even after Friday’s jobs data.
Treasury Auctions this Week
10/06 – 3 year note
10/07 – 10 year note
10/08 – 30 year bond
The “Talking Fed”
10/06 – S.F. Fed President John Williams,
10/08 – Minneapolis Fed President Narayana Kocherlakota
10/09 – Chicago Fed President Charles Evans
Market Wrap-up
Two reports hit, right at 10:00 am EDT:
- ISM Non-Manufacturing: The September reading hit 56.9 vs estimates of 57.7. On the surface you might think that MBS would rally on the miss. But keep in mind 56 is a very strong reading and the Employment Index jumped from 56 in August to 58.3 in September, but new orders lagged.
- Labor Market Conditions Index (LMI): The September release was delayed and when it was finally released it was a disappointment, coming in at 0.0 vs estimates of 1.2; plus August was revised downward from 2.1 to 1.2. But since Friday already jolted the marketplace on their forward-looking views of the labor market, this had no impact today.
Oil: Continues to trend upward, today +1.89% so far. Each incremental gain could signal a little inflationary pressure considering oil was recently at 40.
Tomorrow is a light day with just a 3 year Treasury auction and the Trade Balance report.