What happened last week?
Mortgage backed securities (MBS) lost 54 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week. It was the second straight week of sell-offs of -25BPS or more.
It was a very light week for economic events. Internationally, the ECB meeting grabbed all the attention of traders. MBS were primarily pressured lower (higher rates) due to WTI Oil increasing from an open on Monday of $39.90 and a close on Friday of $43.75.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were lower than expected (247K vs estimates of 263K) and hit a 42 year low! The more closely watched 4 week moving average fell to 260.50K. Continuing Claims were also lower than expected (2.137M vs estimates of 2.171M).
Housing: Weekly Mortgage Applications rose 1.3%. Purchases dropped 1.0% and Refinances gained 3.0%. Existing Home Sales: The March report showed a nice 5.1% gain over February and basically matched market expectations with an annualized sales pace of 5.33M vs estimates of 5.30M.
The March Housing Starts (1.089M vs estimates 1.170M) and Building Permits (1.086M vs estimates of 1.2M) were a tad lighter than expected but February’s readings for both were revised upward. Overall, this data didn’t show any new trends. YOY Starts are up 14.2% which is respectable though.
Across the Pond
ECB: They left their key interest rate unchanged and also kept their negative savings rate unchanged. They did finally release details of their new corporate bond purchase program which will start in June. MBS did fall under some slight pressure on comments made by ECB President Mario Draghi.
What’s on the agenda for this week?
Don’t expect much movement…certainly a reversal from last week’s sell-off is not going to happen. Expect MBS to trade in a thin range until Wednesday’s FOMC meeting. The rest of the week will hinge on their forward guidance. If bond traders feel it leaves the door open for a June rate hike, we may see some pressure.
This is a huge week for economic data and Fed action.
The Big Three
The three biggest events this week with the ability to move pricing are: (1) The FOMC Meeting and Fed Policy Statement, (2) GDP and (3) Oil.
(1) The Talking Fed: The FOMC will conclude two days of meetings and on Wed at 2:00 EST release their Interest Rate Decision and Policy Statement. Note that this meeting will not see a live press conference by Janet Yellen nor a release of their economic projections and dot plot chart. The bond market has zero probability of a rate hike at this meeting and will focus on their forward guidance to try to gauge the probability of a rate hike in June or July.
(2) GDP: We get our first look at the 1st quarter GDP data and it is expected to be under 1% with some estimates as low as 0.3%. This data will be revised several times though. The weaker this number is, the better it is for rates, the stronger it is (say over 1%), the worse it is for pricing.
(3) WTI Oil: Saw some nice increases last week but these are already under pressure as Saudi Arabia has said that it will ramp up production.
Besides the Big Three above, there will also be Friday’s Core YOY PCE data. Last time it was at 1.7%, which is below the Fed’s threshold of 2.0%…the key here is if that moves closer to 2.0%.
Manufacturing will also play a large role as well with the release of Durable Goods Orders and Chicago PMI. Both are expected to have good readings.
Treasury Auctions this Week:
- 04/25 – 2 year note
- 04/26 – 5 year note
- 04/28 – 7 year note.
Across the Pond
Japan: They have their Central Bank meeting on Thursday. The market is speculating that the Bank of Japan may move to lower interest rates on loans below zero (already below zero on savings).
As expected, MBS have done nothing today. There was only some low-level economic data and no new global tension for MBS to react to.
Texas Tea, Black Gold
When the bond market opened, WTI Oil was at $43.26 and now is at $42.70, so there was some downward pressure on Oil prices as Saudi Arabia has said it will expand their oil operations…adding to supply. But there really needs to be over a buck swing in intra-day pricing for it to help with MBS pricing.
Housing: The March New Home Sales report came in lighter than expected (511K vs estimates of 522K) but April was revised upward from 512K to 519K. Basically it’s trending just above 500K, which is a far cry from the 1 million rate during the housing boom. Inventories remain tight at 5.8 months.
Treasury Auction: Today was the 2-year note. Results: $26 billion with a high yield of 0.842%. This was a nice, strong auction. The rate was lower than last month on a 2-year basis (0.842% vs 0.877%) and demand was stronger too (2.64 vs 2.58) as measured by the bid-to-cover ration. The 2-year note is too short a term to influence longer term bonds.
On Deck for Tomorrow: Durable Goods Orders, Consumer Confidence and our 5 year Treasury note auction.
Across the Pond
Great Britain: Their string of better than expected economic data ended this morning with disappointing Retail Sales data. MOM was -1.3% vs estimates of -0.1%, and Ex-Fuel was -1.6% vs estimates of -0.4%.