What happened last week?
Mortgage backed securities (MBS) gained 94 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
Just about all of our domestic economic data showed growth and strength at levels higher than market expectations. This data is negative for MBS (higher rates), yet MBS didn’t sell off – instead they rallied (lower rates). Why? That was due to Fed Speak and Oil.
Texas Tea, Black Gold
After trading above $40 two weeks ago, last week WTI dropped to as low as $36.22, which is a very large swing and was the primary reason that mortgage rates fell. MBS had been under pressure as WTI Oil was rising two weeks ago as it is very inflationary and bond traders viewed it as having an influence on the timing of the next rate hike, but last week those concerns were pulled back as Saudi Arabia said that it would not cut production levels.
The Talking Fed
Two weeks ago, there were several “Talking Feds” (Regional Federal Reserve Bank presidents) and the overall theme of their speeches was very “hawkish”. But last week, both Janet Yellen and Charles Evans came out on the opposite side and were very “dovish,” signaling that the Fed may wait until at least June to make their next move.
Friday’s Jobs report got the most attention but it was a jam-packed week of better than expected data.
Domestic Flavor
Jobs, Jobs, Jobs: Here is the tale of the tape:
- March Non-Farm Payrolls 215K vs estimates of 205K
- February NFP revised from 242K to 245K
- The average for the past 3 months is 209K which is solidly above the 200K mark.
- The Unemployment Rate moved upward from 4.9% to 5.0% which is higher than expected.
But that is due to the Participation Rate moving forward to 63% and showed a fresh and new 400K entering the labor force…but until they find a job, they are counted as Unemployed and drag down the rate.
- Average Hourly Wages (MOM) were up 0.3% vs est of 0.2% and a nice improvement over Feb’s -0.01%.
- Average Hourly Wages (YOY) were up 2.3% vs Feb’s 2.2%.
- The Average Work Week was 34.4 hours which matched Feb.
Manufacturing: The Chicago PMI report was much stronger than expected (53.6 vs estimates of 50.0) and was a nice surge from February’s contractionary reading of 47.6. The ISM Manufacturing Index showed continued growth and expansion in the smallest sector of our economy (Manufacturing 20%/Services 80%). It came in at 51.8 vs estimates of 50.5 and, more importantly, ended the streak of below 50 readings.
Consumer Sentiment for March was revised from the preliminary reading of 90.0 to 91.0 and was higher than the market forecasts of 90.5.
What’s on the agenda for this week?
It was a heck of a rally last week as WTI Oil plummeted, and while it remains below $37, MBS will remain at elevated levels. It will take a break down to $34 for MBS to close above that level.
Last week was all about the Fed and Oil. And this week it will be all about……Fed and Oil.
Three Things
These three items will have the largest impact on intra-day and near-term pricing this week: (1) WTI Oil, (2) The Talking Fed and (3) ISM Services
Domestic Flavor
The Talking Fed: Wednesday, will be the Minutes from the March FOMC meeting and very close attention will be paid to the details. But close attention will also be paid to the following speeches this week as well:
- 04/04 Eric Rosengren and Neel Kashkari
- 04/05 Charles Evans
- 04/06 Loretta Mester and Rob Kaplan
- 04/07 Janet Yellen and Esther George.
This is actually a fairly light week for domestic economic data (in terms of reports that have the gravitas to move pricing). Really ISM Non-Manufacturing Services (80% of our macro economy) is the only report with the weight to move the needle and will be closely watched.
Texas Tea, Black Gold
Friday’s sell off could be a shift into lower prices for a while as over-supply concerns are keeping the pressure on WTI prices. This morning it is still in the 36 handle.
Market Wrap-up
Overview
There was some nice “hawkish” commentary from a Talking Fed and some domestic economic data that was weak, but it was expected. WTI Oil continued to fall (now below $36) but it will take WTI falling closer to $34 before MBS can make a run at some better pricing…and we just aren’t at those levels yet. As a result, MBS have been squeezed into a very narrow range today.
Domestic Flavor
Jobs, Jobs, Jobs: The newly created Labor Market Conditions Index moved from -2.5 in February to -2.1 in March. This is an amalgamation of 19 labor market indicators and certainly does not match the strength in Friday’s NFP and wage data.
Manufacturing: U.S. Factory Orders in February dropped -1.7% which basically matched the market forecasts of -1.6%. This reports a decline of 3.0% in durable goods orders and a pull in petroleum and coal products.
On Deck for Tomorrow: ISM Non-Manufacturing and JOLTS
The Talking Fed
After last week’s “dove-a-thon”, this week starts with a “hawkish” tone. Boston Fed President Eric Rosengren said it was “surprising” that U.S. interest rate futures markets currently imply one or zero rate hikes this year. He said this prediction could prove “too pessimistic.”
Texas Tea, Black Gold
WTI continued its march lower, dropping 3.04% down to $35.67 as over-supply fears continue to pressure pricing.