What happened last week?
Mortgage backed securities (MBS) gained 28 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower from the prior week.
It was yet another week of good economic data (which is normally negative for mortgage rates) but that was offset by several “dovish” comments from Fed members and volatility in Oil prices.
Texas Tea, Black Gold
It was a very choppy session last week with several sessions seeing over a $1 swing in intra-day prices for WTI Oil. On the days that WTI prices increased by a buck, MBS sold off (higher rates) and when WTI sold off by a buck, MBS improved (lower rates). Overall, WTI did trend higher for the week but closed below the important $40 mark which provided terrific support for rates.
The Talking Fed
The minutes were released from the last FOMC Meeting (March). The overall theme was that while the members all have varying opinions of the state of our domestic economy, they all were very concerned with global growth and its potential negative impacts on our economy and our financial system. They had a “wait and see” position to see if things got worse globally or if they leveled off. Most bond traders view the minutes with a lens that shows a June rate hike at the earliest, which is basically the same view traders had before the release of the minutes.
Separately, Federal Reserve Chair Janet Yellen spoke on a panel with former Fed Chairs Bernanke, Greenspan and Volcker. Basically, she defended the Fed rate increase in December and laid out a strong probability of a rate hike or two this year. She said: “The U.S. economy has continued to progress in a satisfactory way. We continue to see good job performance, some evidence of inflation moving up, so that was our expectation when we raised rates in December.” And Yellen added, “So yes, there is accommodation in the monetary policy that we have. But we think the gradual path of rate increases will be appropriate. We remain on a reasonable path and I don’t think December was a mistake.”
Domestic Flavor
ISM Services: ISM Manufacturing two weeks ago, was stronger than expected (20% of the macro picture) and last week we get the other 80% with Non-Manufacturing and it was stronger than expected (54.5 vs estimates of 54.0). This is the best reading since December of last year. The employment component rose from 49.7 to 50.3 which is very important. This was a strong report.
What’s on the agenda for this week?
WTI took a swing at $40 but it’s stuck at that level. The week starts off with a “yawn” as there is nothing of note today. But it is a very robust week. MBS is expected to trade within the same relative range as last week until Friday. And then it will depend on the Chinese GDP data. There could be a lot of volatility on Friday as a result.
Three Things
Here are the three top items to watch this week as they have the greatest potential to impact pricing. (1) China, (2) Oil and (3) Retail Sales.
(1) China, China, China: Since Yellen and crew have made it quite clear that they will be simply reacting to China’s growth (or lack thereof), their GDP release on Friday will hold a lot of weight with long bond traders that accurately perceive that the statisticians at the PBOC are actually in control of our domestic rate policy. So, the higher their 1st quarter GDP is, the worse it is for MBS rates, the lower their GDP is…the better it is for MBS rates.
(2) Oil: There is a big pow-wow in Qatar on Sunday and the WTI Oil pricing will be volatile this week on comments by various Energy Czars from oil producing countries. As sentiment increases that there will be an accord that results in an output freeze, then WTI will move upward and MBS pricing will move lower. And vice versa if sentiment decreases on an output freeze.
(3) Retail Sales: Unlike last week, this week is chock-full of economic data (except for today). There is a lot of inflationary data with PPI, CPI and Import Prices but the biggest domestic release is Wednesday’s Retail Sales report. The market is expecting a nice reversal from February’s -0.1% to an estimate of +0.4% in March. While the jobs data and rising wages may support that notion, Consumer Credit levels do not. The higher the Retail Sales reading is, the worse it is for rates. The lower Retail Sales are, the better it is for rates.
The Talking Fed
There will be the Fed’s Beige Book on Wednesday. This report is an anecdotal report from the 12 districts and it is specifically prepared for the April FOMC meeting.
04/11 Rob Kaplan
04/12 Patrick Harper, John Williams and Jeffrey Jacker
04/14 Dennis Lockhart, Jerome Powell
04/15 Charles Evans
Treasury Auctions This Week
04/12 3 year note
04/13 10 year note
04/14 30 year bond
Across the Pond
China: Their PPI for March declined for the 49th straight month, coming in at -4.3% on a YOY basis. However, this was actually much better than the market expectations of -4.6% and better than the last reading of -4.9%.
Market Wrap-up
Overview
The week opened with a very mild trading session with zero domestic releases today. MBS were on the move lower in early trading as WTI made a bee-line towards $40 but oil prices simply couldn’t muster any further gains. Even though today was a real “yawner,” a lot of volatility is expected for the rest of the week.
On Deck for Tomorrow: FNMA Coupon Roll Over, Import and Export Prices, 3 year Treasury Note auction.
Across the Pond
China: Their PPI for March declined for the 49th straight month, coming in at -4.3% on a YOY basis. However, this was actually much better than the market expectations of -4.6% and better than the last reading of -4.9%.