What happened last week?
Mortgage backed securities (MBS) gained 41 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower from the prior week. However, MBS lost a total of -25 BPS for the month of April (even with last week’s run up of +41) which means that Mortgage rates at the end of April were slightly higher than at the beginning of April.
The two biggest events last week were the Fed’s inaction and several GDP releases.
The Talking Fed
The FOMC (Federal Open Market Committee) left its key interest rate unchanged. You can read their official policy statement here. There was one dissenting vote: Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent, she also voted against leaving rates unchanged at the previous meeting.
They certainly left the door wide open and even increased the probability in most bond traders’ minds of a June rate hike by letting us know that they are (U.S.) data dependent moving forward.
While they pulled back from blaming international forces (China), they walked a fine line of praising our economy and warning of weakness as well. Their overall theme to the market place was to watch domestic data for growth.
U.S.: The estimates for our 1st quarter GDP were all over the place…just about every major economic outlet had a different “consensus” (Econcal, Briefing, Reuters, etc.). The prelim data came in at 0.5%. That is on the lower end of the 0.5% to 0.9% estimate range but above the Atlanta Fed’s estimate of 0.3%. So, this really wasn’t that much of a miss…if a miss at all. This number will be revised two more times and usually revisions to GDP are upward…so after about two months this might be in the 0.7% to the 0.9% range.
EU: There was some stronger than expected data out of the EU, as they released their 1st quarter GDP data and it hit 0.6% vs est of 0.4%. Also, their Unemployment Rate dropped from 10.4% down to 10.2%.
Great Britain: Their 1st quarter GDP matched expectations with a a reading of +0.4% and their YOY GDP was a tick stronger than expected with 2.1%.
What’s on the agenda for this week?
MBS have no real path towards better pricing. ISM Prices Paid was much higher than expected and is also weighing on pricing. The downside is limited as well as there is seemingly strong support just below the current levels at the 50 day moving average. In order for MBS to really rally this week, it needs a dismal Jobs report on Friday…and based upon all the labor data there is nothing to suggest a disappointment.
The Big 3
The three biggest events to watch this week are: (1) Jobs Friday, (2) Manufacturing/Services data and (3) The Talking Fed.
(1) Jobs, Jobs, Jobs: There is a glut of jobs related data this week (ADP, Challenger Job Cuts, Weekly Claims, Non-Farm Payrolls, Unemployment Rate, Average Hourly Wages and more). The “more” includes lots of internal readings in other reports like Productivity (Unit Labor Costs) and others. The bond market will be focusing on cumulative theme of wages as higher wages seems to be the only threat of inflation that the Fed can hang their hat on.
(2) Manufacturing/Services: We are loaded with data this week. The week started out with ISM Manufacturing which only accounts for about 20% of our economic output. ISM was lighter than expected but it was still above 50.0 and the internal ISM Prices Paid jumped to 59 which was much higher than expectations of 52.0 and signals pricing pressures (inflation).
Construction Spending was lighter than expected (0.3% vs estimates of 0.5%), but this is still a huge turnaround from the last reading of -0.5%.
The most important report of the week will be Wednesday’s ISM Services (80% of our economy); also Factory Orders and Productivity.
(3) The Talking Fed:
- 05/05 – Dennis Lockhart, (ECB) Mario Draghi, John Williams
- 05/06 – Loretta Mester, Dennis Lockhart
- 05/07 – Neel Kashkari
As expected, MBS have been stuck in a very narrow range – sandwiched between the 25 day and 50 day moving averages all day. Our own domestic data was negative for MBS even though it was a tad weaker than expected (on a headline basis). The 25 day has once again proven to be very strong.
MBS have no real path towards better pricing. ISM Prices Paid was much higher than expected and is also weighing on pricing. The downside is limited as well, as there is seemingly strong support just below the current levels at the 50 day moving average. In order for MBS to really rally this week, there needs to be a dismal Jobs report on Friday..and based upon all the labor data there is nothing to suggest a disappointment.
On Deck for Tomorrow
Total Vehicle Sales (it’s a light day).
The Talking Fed
Atlanta Fed President Dennis Lockhart had opening remarks but nothing noteworthy to bond traders. He kicked off the Atlanta Fed’s Financial Markets Conference.
Super Mario: ECB President Mario Draghi discussed the long-term impact of negative interest rates on Asia. Meanwhile, the Germans are fit to be tied over their savings rate that has been crushed by his policies.