I hope you had a great Easter!
What happened last week?
Mortgage backed securities (MBS) lost 29 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
Last week was a holiday-shortened trading session in the long-bond market with Friday’s close for Good Friday.
GDP: 4th quarter GDP (3rd release) came in at 1.4% vs estimates of 1.0%. This is a much stronger revision than expected as four tenths on an economy our size is huge.
Manufacturing: With all of the better than expected regional manufacturing reports, it’s a disappointment that Durable Goods Orders were so weak. The Headline number for February was -2.8% vs estimates of -2.9% – so a little better than expectations (really less-worse), but when you strip out the big volatile Transportation sector, it was much weaker than expected (-1.0% vs estimates of -0.2%). Plus, January’s robust readings were revised lower.
Jobs, Jobs, Jobs: Initial Weekly Claims were a smidge lower than expectations (265K vs estimates of 268K). The more closely watched 4 week moving average dropped below 260K (259.75) which is an extremely low trend line and a positive for the labor market and our economy.
The Talking Fed
There were several speeches last week and even though most of them were from non-voting members, the overall theme was that sentiment among the Federal Reserve Presidents seems much more “hawkish” (rate tightening) than previously thought.
Chicago Fed President Charles Evans said in a speech in Chicago that he sees strong economic growth and that the Fed is in a “wait and see” course and should act once they see the economy on a “path” to 2% inflation. MBS sold off on this for two reasons: (1) He is usually considered very “dovish” but these were “hawkish” comments, and (2) The specification of a “path towards 2%” inflation is not the same as seeing 2% inflation, i.e., the Fed can act sooner.
St. Louis Fed President James Bullard said, “The relatively minor downgrades…suggest that the next rate increase may not be far off, provided that the economy evolves as expected,” as he has switched to a more hawkish tone from last month.
Philadelphia Fed President Patrick Harker, said that while he supported March’s decision by his colleagues to leave policy unchanged, “there is a strong case that we need to continue to raise rates.”
“I think we need to get on with it,” said Harker, and “This economy is really quite resilient to a lot of the headwinds (including the strong dollar), so if that continues I would be supportive of another 25 basis point rise.”
What’s on the agenda for this week?
Clearly, bonds are poised to go lower. All it will take is a spike ($45) in WTI Oil or some more hawkish comments out of Yellen and crew. This is going to be a choppy week and we very well may see a small run….but if we get one just take it and get out, don’t assume it’s a trend. The only way for MBS to reverse the month-long trend in March (-81 BPS) is to get a much weaker than expected NFP report on Friday, and given all of the other labor related data, that isn’t very likely.
This is a very robust week for data and Fed speak culminating with our Big Jobs Friday.
Here are the three most important items that have the greatest ability to impact pricing: (1) Jobs data, (2) Janet Yellen and (3) Oil prices.
Jobs, Jobs, Jobs: There is a glut of jobs related data this week with ADP Private Payrolls, Challenger Job Cuts, Initial Claims, Non-Farm Payrolls, Unemployment Rate and Average Hourly wages. Plus there is a lot of wage data buried in other reports like PCE and ISM. With a 4 week moving average of below 260K in Initial Weekly Jobless Claims, it is difficult to see a big miss to the downside with Friday’s expected Non-Farm Payroll data. Bond traders will be paying special attention to that Average Hourly Wages data which is currently up 2.2% on a YOY basis. The MOM reading is expected to come in at +0.2% which would be a nice increase over last month’s -0.1%.
The Talking Fed
It’s easy to forget that even though there has already been a Fed meeting this month, there will be another one the last week of April. Janet Yellen will speak before the Economic Club of New York and will get a lot of attention. But also speaking are:
03/29 – John Williams, Rob Kaplan, Janet Yellen
03/30 – Charles Evans
03/31 – William Dudley
04/01 – Loretta Mester
Treasury Auctions this Week
03/29 – 2 year note
03/30 – 5 year note
03/31 – 7 year note