What happened last week?
Mortgage backed securities (MBS) gained 34 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower from the prior week. It was the second straight week of improvement.
Jobs, Jobs, Jobs
The two biggest events of the week were the big Jobs reports on Friday.
The media went bananas over the headline Non-Farm Payroll report that came in short of expectations (160K vs estimates of 200K). But long bonds (specifically mortgage backed securities) did not improve on that headline; instead they sold off (which is bad for rates).
That is because long bonds focused more on the Average Hourly Wages which increased 0.3% on a month-over-month basis and is up 2.5% on a year-over-year basis. The later was much stronger than expected and shows real wage inflation. While the Fed isn’t seeing their core PCE inflation of 2.0% yet, we are certainly seeing it in the jobs sector.
While the April NFP reading was lighter than expected (led by a continued drop in mining and energy), it will be revised two more times and likely to be revised upward. The average for the past three months is still above 200K.
The Unemployment Rate remained unchanged at 5.00% even though the participation rate dropped a tad.
ISM Non-Manufacturing: This was the most important report of the day. The services sector showed some real strength with a reading of 55.7 which was a full point higher than market expectations. Anything above 50 is expansionary and this reading above 55 is robust for the 80% of our economy that it covers.
The Talking Fed
S.F. Fed President John Williams said in an interview that he would support a rate hike in June if the economic data continued to show growth.
Atlanta Fed President Dennis Lockhart said: “Two rate hikes are certainly possible. We have enough [Fed policy] meetings remaining but it depends entirely on how the economy evolves.”
What’s on the agenda for this week?
The Big 3: The three biggest events of the week that have the greatest potential to drive pricing are: (1) Retail Sales, (2) PPI (core) and (3) Treasury Auctions.
Treasury Auctions this Week
- 05/10 – 3 year note
- 05/11 – 10 year note
- 05/12 – 30 year bond – most important of the week.
The Talking Fed
- 05/09 – Charles Evans, Neel Kashkari
- 05/12 – Loretta Mester, Eric Rosengren, Esther George
- 05/13 – John Williams
Domestic Flavor
Other than Friday’s Retail Sales and PPI data, the rest of the week is very light on data with enough gravitas to move the needle on pricing.
There are three more pieces of jobs data with the Labor Market Conditions Index, JOLTS and Weekly Claims, but these are unlikely to change any traders’ opinion on the labor market after Friday’s data.
There are also both Wholesale Inventories and Business Inventories this week. These will help to shape guestimates on the first revision to the 1st quarter GDP data but won’t move the needle on pricing.
Market Wrap-up
Overview
The stock market (DJIA -34.10) is down a smidge…both stocks and bonds were quiet today.
As expected, MBS have been very quiet today with only one lower level economic report and nothing really new in the geo-political front to shock MBS out of their channel.
Domestic Flavor
Jobs, Jobs, Jobs: The LMCI came in at -0.9 which is actually an improvement over March’s -2.1. Still this is the 4th straight month of contraction in this made-up index by the Fed’s research department which combines 19 indicators, but the results never jive with any other labor report.
On Deck for Tomorrow: Wholesale Inventories, JOLTS and a 3 YR Treasury note auction.
The Talking Fed
While at a conference in London, Chicago Fed President Charles Evans said, “While the fundamentals for U.S. growth continue to be good, uncertainty and risks remain. In my opinion, the continuation of ‘wait and see’ monetary policy response is appropriate to ensure that economic growth continues.”
Texas Tea, Black Gold
WTI Oil lost 2.87% and pulled back to $43.38 as the oil market is starting to pull away from the run up in oil prices due to the Canadian wildfire.