What happened last week?
Mortgage backed securities (MBS) lost 37 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
Net of the monthly rollover, MBS were actually unchanged for the week. MBS were stuck in a very well-defined trading channel all week as there simply were no major surprises to jolt MBS out of the channel. There were three very successful Treasury auctions (3Y, 10Y and 30Y) but they held no sway on pricing.
It was a week that had huge potential for volatility, but in the end MBS (and rates) moved sideways for the majority of the week.
Domestic Flavor
Retail Sales: Potentially the most significant data point of the week disappointed. The headline reading for March was -0.3% vs estimates of +0.1%. When you strip out Autos, the reading also fell short (0.2% vs estimates of 0.4%). The only bright spot was that February was revised upward for both readings. Gasoline sales did have a rare increase, boosted by higher prices at the pump but really this overall is a very weak report.
Inflation? This was a mixed bag as the Producer Price Index (PPI) showed zero threat of inflation on the front-end of the equation, but Consumer Prices (CPI) did show some increases on the back-end of the equation. The YOY Core PPI data came in at 1.0% which fell back from February’s 1.2% reading. The MOM readings also showed weakness with Headline PPI (-0.2% vs estimates of +0.1%) and Core PPI (-0.1% vs estimates of +0.1%).
For CPI, both the Headline and Core MOM readings showed inflationary increases of +0.1% over the prior month. The more closely watched CORE YOY dipped from 2.3% down to 2.2% but still above the important 2.0% level watched by the Fed.
The Talking Fed
The Fed’s Beige Book hit at 2:00pm EDT. You can read the official release from the Fed here.
Overall, the tone of this report that is prepared specifically for the April FOMC meeting was of a growing economy seemingly supportive of rate tightening.
Since this isn’t a data point, traders like to focus on word searches. Here are a few key ones:
- “Weather” was used 28 times in January, 17 in March and 18 in April
- “Stock Market” was used 3 times in March but only 1 time in April
- “Global” was used 11 times in March but only 2 times in April
- Wages saw good growth in every region except one (Atlanta).
Just about all of the districts reported improving credit conditions and Stable to Moderate Growth.
Across the Pond
China: Their GDP data was right in the wheelhouse of market expectations hitting 6.7% on a YOY basis. The market expectations were in the 6.5% to 6.8% range. This is a slightly slower pace than the 6.8% reading last quarter but again it was basically what the market expected. Long bond traders are still in a “wait and see” mode with this data. This growth rate is basically double that of the U.S. and many of the huge levels of stimulus that China has enacted are just only starting to move their economy.
What’s on the agenda for this week?
MBS will trade in the exact same channel as last week unless some unexpected geopolitical event happens. They are simply in a holding pattern until next week’s FOMC meeting. The only shot at breaking out of the channel is if WTI Oil heads towards $36 or breaks above $43. Otherwise it will be a boring week, which is great news for keeping rates at current levels. But holding out for lower rates? Forget about it.
There are no Treasury auctions this week.
The Talking Fed
We enter the “black out” period on Wednesday as members of the Fed are not permitted to speak prior to next week’s FOMC meeting. Speaking today are William Dudley, Neel Kashkari and Eric Rosengren.
Domestic Flavor
Housing: While there are no major economic reports that have the gravitas to move rates, there will be a lot of housing data that will give a very good read on the health of our housing market. The most import report of the week is Wednesday’s Existing Home Sales report for March. The market is expecting a nice gain from February’s reading of 5.080M up to 5.300M this time around. Also this week are the Home Builder’s Index, Mortgage Applications, New Housing Starts, Building Permits and FHFA Home Price Index.
Texas Tea, Black Gold
The big meeting in Qatar came and went on Sunday and it was a big nothing. The major oil producers in the region failed to reach a deal to freeze production levels which has driven WTI prices back below $40.
Across the Pond
China: While we await a glut of domestic housing news this week, China’s home prices in March rose at their fastest pace in two years which is another sign that things are stabilizing there.
Market Wrap-up
Overview
Move along folks…nothing to see. As expected, MBS have moved in a very narrow range today. There were no major economic releases.
Domestic Flavor
Housing: The April Home Builder’s Index (NAHB) matched March’s reading of 58. A fairly solid report but not a factor in pricing.
The Talking Fed
New York Fed President William Dudley spoke today. He said economic conditions are “mostly favorable” yet the Federal Reserve remains cautious in raising interest rates because threats loom. He reiterated that the rate tightening path will be very gradual. There was certainly nothing in his speech to cause any long bond traders to consider that this voting member of the FOMC would be in favor of raising rates next week. Yellen and Rosengren also speak today.
Texas Tea, Black Gold
Qatar is kaput. The meeting on Sunday bore no new output freezes. As a result, WTI lost ground from Friday’s close but managed to increase in intra-day trading from the 8:00am EDT mark to sniff around the $40 mark again.
On Deck for Tomorrow: New Housing Starts, Building Permits.