What’s on the agenda for this week?
This morning’s domestic economic data and action by PBOC will keep MBS in the green but there is still plenty of upward resistance so the upside is below +19BPS for the day. For the week, MBS is expected to trade within the same relative range that it has for the past two weeks. It will take either a very strong or very weak Average Hourly Wages report on Friday to break it above or below the channel. Barring that…it’s going to be more of the same with volatility based mostly on Oil swings.
This is a huge week for economic data but will any of it change the Fed’s minds on when (if) to hike?
The Big Three: (1) Jobs, (2) Services and (3) Manufacturing.
Jobs, Jobs, Jobs: There are a dozen different data points this week that either deal with jobs directly or labor costs. The tidal wave of jobs data really kicks off Wednesday with the ADP Private Payrolls report and culminates with Big Jobs Friday. Last time around, Non-Farm Payrolls (NFP) disappointed but Average Hourly Wages were much stronger than expected and that latter is what drove pricing. The focus will be on the prior revisions to the NFP data and the strength of the Average Hourly Data.
The Talking Fed: S.F. Fed President John Williams will speak on Wednesday but the focal point this week is the release of the Fed’s Beige Book. This is the report that comes out 2 weeks before the Fed’s policy meeting and it is an anecdotal report on the state of the economy in each of the 12 Fed’s districts.
Manufacturing: The week started off with today’s Chicago PMI and it was much weaker than expected, coming in at 47.6 vs estimates of 53.0. Remember, any reading below 50 is contractionary. But more importantly is Tuesday’s ISM Manufacturing report which is expected to come in below the very important 50.0 level again. There will also be Factory Orders, Non-Farm Productivity and Unit Labor Costs. Labor costs last time around really surprised to the upside and was a great leading indicator for the big rise in Average Hourly Wages, so that data point will be watched closely.
Non-Manufacturing: More importantly than all the manufacturing data above, we will get our national report card on the Services sector with Thursday’s release of the ISM report. This sector (by many guestimations) is now over 80% of our total real economic output (compared with text book definitions of 66%).
Housing: Pending Home Sales in January were lighter than expected despite falling mortgage rates (-2.5% vs estimates of +0.5%). Since these are “pending,” many will not close. Still, it’s yet another report that demonstrates a huge lack of available inventory and shores up the “seller’s market” theme.
Across the Pond
China: The People’s Bank of China (PBOC) surprised the markets by lowering its reserve requirement ratio (RRR) by 50 BPS, down to 17%. Basically, this gives their largest lending institutions permission to use their cash that had been forced to sit on the sidelines to get out there and lend…effectively pumping $100 billion into their economy. Our long bonds have not had a real reaction to this.
What happened last week?
Mortgage backed securities (MBS) lost -13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
Texas Tea, Black Gold
WTI Oil prices continues to be a major factor in pricing and rates. Lower Oil prices are really a proxy now for bond traders to bet/hedge on the timing of the next rate hike by the Federal Reserve. As Oil stays close to $30 or below, it prolongs our time at these uber low mortgage rates as traders are pricing in zero chance of a rate hike this year due to no inflation. But as Oil moves towards $35 per barrel, MBS start to sell off, as it opens the window (at least in traders’ minds) of a rate hike or two this year.
Durable Goods: Was much stronger than expected in January. This report has seen some wild swings in the past 12 months though. The headline reading was almost double the market expectations (4.9% vs estimates of 2.5%) and core number (Ex Transports) was a very strong 1.8% vs estimates of only 0.2%.
There was a string of weak manufacturing reports, but was last week’s much stronger than expected Industrial Production report an anomaly or a real sign of some progress? The Durable Goods report puts manufacturing in that second category. While it is still too early to say that the manufacturing sector has come back to life, it is very clear that not all the data is negative either.
GDP: We got our first revision to the previously released 4th quarter GDP and it was much stronger than expected. It was originally released last month at 0.7%. The market was expecting it to be cut in half down to 0.4% with some estimates as low as 0.2%. But it surprised to the upside, hitting a solid 1.0%.
Personal Outlays: Across the board this is hotter than expected and negative for rates. Personal Income continues to increase, this time at 0.5% vs estimates of 0.4%. Wage inflation is real and it has been the only thing the Fed has been able to hang their hat on. Personal Spending finally saw some improvement and was stronger than expected as well (0.5% vs estimates of 0.3%). When the Fed talks about their 2% inflation rate, they are really talking about the YOY (year over year) Core PCE rate. This shot up from 1.4% in December to 1.7% in January, and was much higher than forecasts of 1.2%. It’s still below the 2% threshold though.
Manufacturing: The week starts off with today’s Chicago PMI and it was much weaker than expected, coming in at 47.6 vs estimates of 53.0. Any reading below 50 is contractionary.
Texas Tea, Black Gold: WTI made some gains today due to comments out of Saudi Arabia that they will work with other crude producers to limit output. But we have seen this position “flip flop” several times.
On Deck for Tomorrow: ISM Manufacturing, Construction Spending and Total Auto Sales