What happened last week?
Overview
Mortgage backed securities MBS) lost 5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
MBS were trapped in a very narrow technical range, squeezed in between the 50 day and 100 day moving averages. There were a lot of speeches by Federal Reserve members and they all certainly leave the door open for a rate hike in June/July but the bond market was effectively “on hold” until next week’s jobs data.
Domestic Flavor
Housing: Pending Home Sales for April were much higher than expected with a nice jump of 5.1% when market only anticipated a 0.6% MOM gain. YOY, it is up 4.6% which is a big increase over the last reading of 1.4%.
New Home Sales surprised to the upside by jumping 16.6% on a MOM basis, hitting 619K units vs forecasts of 523K. The median price increased 7.8% to $321,100 which tells you that they are not building for the first time home buyer segment where we have huge inventory shortages.
Manufacturing: April Durable Goods were much higher than expected (3.4% vs estimates of 0.4%). Now, there have been huge swings in that headline numbers due to air craft orders, etc. So, strip that out and look at Durable Goods ex-Transports and it increased by 0.4% vs estimates of 0.3%. Plus March was revised from -0.2% to +0.1%. Overall, a very robust report but there was an area of weakness as the Core Capital Goods dropped 0.8% and marks the third straight month of declines in that component of this index.
The Talking Fed
St. Louis Fed President James Bullard stressed that the labor markets are relatively tight and may put upward pressure on inflation. (note: this is why there is so much focus on Average Hourly Wages).
Philly Fed President Patrick Harker told the Philadelphia Bond Club that “There will likely be two or perhaps even three rate hikes over the course of the year,” which follows the big wave of Talking Feds pointing to a June/July Rate Hike.
Dallas Fed President Robert Kaplan was also on board with two rate hikes this year: “If economic data keeps going the way it is, I’ve said I will advocate for an increase in the near future,” and “That may not be June or July, My approach is take one meeting at a time.” He also mentioned that a “Brexit” could be a factor at this June’s meeting.
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.
Fed Reserve Chair Janet Yellen said that the economy has picked up from the slow pace of 4th and 1st quarters and that she expects that both the labor market will continue to tighten and the economy to grow at the pace that it has been so far in 2nd quarter at the least. And if that is the case, then the Fed will be ready to act in the “coming months” however it is contingent on the data.
What’s on the agenda for this week?
The Fed Beige Book and Friday’s Average Hourly Wages (NFP means nothing) can push MBS lower but the ECB could push them higher. Floating right now is very risky…the only chance that it could pay off is for Friday’s Average Hourly wages to be below 0.0% AND (yes both must happen) the ECB needs to announce an unplanned and unexpected round of QE.
This is a very robust week for economic data that is crammed into a holiday-shortened week.
The Big Three
The following are the three biggest events that will grab bond traders’ attention this week: (1) Jobs (average hourly wages), (2) European Central Bank (ECB) action, and (3) The Fed (Beige Book and another round of MBS sales.
(1) Jobs, Jobs, Jobs: There is a slew of jobs/wages related data this week (Personal Income, ADP, Non-Farm Payrolls, Unemployment Rate, Average Hourly Wages). The Non-Farm payroll data may appear to be weaker than recent trends (another sub-200K reading); however, that is partially due to the fact that the labor market is so strong right now that there is very little slack, which generally forces wages to rise. It is the pace of those wage gains that the Federal Reserve is focusing on.
(2) European Central Bank: They issue their interest rate decision early in the morning and then later in that morning we get their policy statement and a live press conference with their President, Mario Draghi
(3) The Fed: There are a few speeches this week but Wednesday will get the most attention with the release of their Beige Book (prepared specifically for the June Fed meeting) and only the second round of MBS sales since the financial crisis started as part of their testing process.
Domestic News
Personal Income rose another 0.4% and Personal Spending jumped 1.0% while Core YOY PCE remained unchanged at 1.6%, still below the Fed’s target rate of 2.00%. But remember it’s not the current rate that the Fed focuses on…it’s their projected rate moving forward.
Market Wrap-up
Overview
MBS were under pressure in early trading due to a strong Personal Income and Spending Report. Then there was a nice technical bounce off of the 100 day moving average into positive territory after a much weaker than expected Consumer Sentiment report. But it was the decline in WTI Oil that gave the best pricing levels of the day but those gains couldn’t hold as they violated upper resistance at the 50 day moving average.
The Fed Beige Book and Friday’s Average Hourly Wages (NFP means nothing) can push MBS lower but the ECB could push it higher. The ECB needs to announce an unplanned and unexpected round of QE.
Texas Tea, Black Gold
WTI had an intra-day drop of over a dollar and anytime oil moves over a buck in a day, MBS react. Today was no exception as WTI OIL moved from a high of $50.00 to a low of $48.81 as the UAE Oil Minister said that he was “happy” with the current oil market. That caused traders to speculate that not much would come out of this week’s OPEC meeting. We are bound to get many conflicting interviews with oil peddlers leading up to the meeting.
Domestic Flavor
Personal Income rose another 0.4% and Personal Spending jumped 1.0% while Core YOY PCE remained unchanged at 1.6%, still below the Fed’s target rate of 2.00%. But remember it’s not the current rate that the Fed focuses on…it’s their projected rate moving forward.
Chicago PMI fell short of projections and moved into contractionary territory (49.3) but its ISM manufacturing that will drive the markets.
Consumer Confidence was weaker than expected, coming in at 92.6 vs estimates 96.0 and has helped us move off of our bottom.
On Deck for Tomorrow: ISM Manufacturing, Construction Spending, Total Auto Sales, Fed’s Beige Book and the Fed selling GNMA MBS.