What happened last week?
Mortgage backed securities (MBS) lost 53 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
The downward shift in pricing was primarily due to the Federal Reserve that raised the probability (in bond traders’ minds) that a rate hike in June/July is very much on the table and that it would take a complete divergence from our current economic path for them not to raise rates.
The Talking Fed
You can read the official release of the FOMC Minutes here.
Even though there was one dissenting vote, there were actually several members that were supportive of a rate hike at the April meeting. They had less concern over global weakness (China) but did voice concern over how financial markets would react to a “Brexit.”
They certainly left the door wide open for a rate hike in June and feel that the economic data from the 2nd quarter will support it. (read between the lines….the current trend of economic data IS STRONG ENOUGH RIGHT NOW FOR A HIKE..IT WILL TAKE A REVERSAL OF THIS TREND FOR THEM TO NOT RAISE RATES). They voiced concern that the majority of the markets are not taking the various and sundry talking Feds seriously and are not pricing in a rate hike even though the Fed has been telegraphing one for some time.
Richmond Fed Reserve President Jeffery Lacker stated that the markets totally misinterpreted the Fed’s statements and bias from their March and April meetings and that he supported a rate increase in April (but he didn’t vote against leaving rates alone). He also said he sees potential for up to four rate increases still this year.
New York Fed President William Dudley said, “We are on track to satisfy a lot of the conditions” for a rate increase. And, “If I am convinced that my own forecast is sort of on track, then I think a tightening in the summer, the June-July time frame is a reasonable expectation.” Dudley is a permanent voting member.
What’s on the agenda for this week?
Wednesday will be interesting with the Fed selling MBS since it’s not something that we have seen before. Friday’s speech by Yellen is probably the most significant event as we will see if she continues the trend of “hawkish” commentary by every other Fed official. But essentially, our bond market is on pause as we are awaiting next week’s OPEC meeting and the ECB’s policy statement.
The Big Three
The three items that bond traders will be watching very closely this week are (1) Yellen, (2) Economic Data and (3) MBS sales.
(1) Yellen is yelling: She will speak at Harvard on Friday as they present her with an award. The ranks of the other Talking Feds has been very clearly pro-rate hike but she has been seen as more dovish. The markets will be watching intently to see if she appears to be shifting her bias as they will take that as a signal that a rate hike is coming.
(2) Economic data: The two biggest reports this week are Durable Goods and GDP. The Durable Goods are expected to see a very nice improvement (ex-autos) while the first print of the first quarter GDP is expected to be revised upward.
(3) Fed starts to dump MBS: They will do their “testing” of selling some of their vast MBS holdings on Wednesday. They have been a major purchaser every week, eating up supply but on Wednesday they will start to sell…$120M.
Treasury Auctions This Week
05/24 2 year note
05/25 5 year note
05/26 7 year note
The Talking Fed
05/23 James Bullard, John Williams and Patrick Harker
05/25 Robert Kaplan
05/26 Jales Bullard, Jerome Powell
05/27 Janet Yellen
As expected, it was a nice and boring session with MBS confined to the current intra-day channel. It was a very light day with zero domestic economic data.
The Talking Fed
St. Louis Fed President James Bullard said that a tight labor market makes the case for raising interest rates and that holding rates too low for too long can be very bad for financial markets.
S.F. Fed President John Williams said that the Federal Reserve is on track to hike interest rates in June or July despite risks such as a “Brexit” vote, and will continue with even more hikes next year given U.S. economic strength.
So, the week starts off with two more statements that clearly support a rate hike, but what is interesting is Williams’ specific comments that they should raise rates even if Great Britain leaves the Euro Trade Zone which is something that analysts said could keep the Fed from raising rates.
On Deck for Tomorrow
2 year Treasury Note auction, New Home Sales and the Richmond Fed Mfg Index.