What happened last week?
Overview
Mortgage backed securities (MBS) gained 67 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week. MBS finally broke out of the very narrow range that they have been trapped in for several weeks but it took a much weaker than expected payroll report to do it.
It was a holiday-shortened week that was packed with big economic reports, the European Central Bank and the release of our Fed’s Beige Book.
Jobs, Jobs Jobs
BIG JOBS Friday came and went and the only thing missing were the actual jobs 🙂
Tale of the tape:
Non-Farm Payrolls (NFP) May 38K vs estimates of 164K
NFP April revised downward from 160K down to 123K
NFP March revised downward from 208K down to 186K
The three month moving average is now just 116K per month
Unemployment Rate 4.7% vs estimates of 4.9%
Participation Rate dropped down to 62.6%
Average Weekly Hours 34.4 vs estimates 35.5
Average Hourly Wages May 0.2% vs estimates 0.2%
Average Hourly Wages for April revised upward from 0.3% to 0.4%
Average Hourly Wages YOY remained at 2.5%
Here is how bond traders viewed this data (which often can be very different from currency and stock traders). First, the headline print of 38K is basically being massaged upward to 78K as we add in 40K of striking Verizon and other company workers. Still, that is HALF of the market expectations and the downward revisions to the two prior months are concerning. It is fully expected that the 38K will be revised upward next month but the damage has already been done and bond traders are now looking to July or September for our next rate hike.
Wage inflation is here and it is real at 2.5% on a year-over-year basis. On a month-over-month basis it continues to march upward. Slower job additions will only increase wage pressure. So, this is the one bright spot but is being overshadowed by the NFP.
The Talking Fed
The Beige Book (named for the color of its wrapper/binder), which is specifically prepared for this upcoming Fed meeting was released on Wednesday. You can read the official report here.
Overall, it was an upbeat report. Information received from the 12 Federal Reserve Districts mostly described modest economic growth since the last Beige Book report. Tighter labor markets were widely noted among most of the 12 districts along with modest wage growth. The broader tone of the report showed that with the exception of one or two districts, Consumer Spending, Real Estate, Manufacturing, Loan Demand, etc., were all up. This report certainly leaves the door open for a June or July hike. The bond market has put more weight on a July hike after the report.
What’s on the agenda for this week?
Expect to see some very attractive pricing this week…certainly better than two or three weeks ago…but further rallies above Friday’s highs? Forgetaboutit. MBS are down a few BPS as they are pulling away slightly from the “danger zone.” As such, there is no reason to float with the express expectations for better pricing.
The Big Three
The top three events that have the greatest ability to impact pricing this week are: (1) Janet Yellen, (2) Oil and (3) Consumer Credit.
(1) Yellen is Yelling: She spoke twice today (12:30 and 2:00 EDT). Afterwards, the Fed will enter their “blackout” period (which means no Talking Feds for one week before the Fed meeting). The market wants to see if she downplays the miss in NFP due to seasonality, etc., and if she thinks it’s more of a “one off” or part of a trend. If she downplays it, bond traders will think that July is still possible. If she expresses deep concern, then the bond market will scrap July and focus on September for the next rate hike.
(2) Texas Tea, Black Gold: Oil sold off last week as the OPEC meeting yielded nothing. But this week, WTI is in positive territory on supply disruptions out of Nigeria and comments out of Saudi Arabia that supply could be falling due to increased demand.
(3) Consumer Credit: Normally, this would not be in the top three but this is a very light week for economic data. This is really a proxy for Consumer Spending and we stripping out auto and student loans will show the increase in revolving debt. The higher revolving debt is, the more consumers are spending which may lead to a stronger retail sales report.
The Talking Feds
06/06 Eric Rosengren, Dennis Lockhart, Janet Yellen
Treasury Auctions this Week
06/07 3 year note
06/08 10 year note
06/09 30 year bond
Across the Pond
Germany: April Factory Orders were much worse than expected (-2.0% vs estimates of 0.6%) which is certainly negative for the Eurozone.
Market Wrap-up
Overview
Today’s trading session showed that MBS could not trade higher today and did not sell off either, and lost a few BPS. There was no major economic data. WTI Oil did make some gains and will continue to provide overhead pressure near the $50 mark. The “Talking Feds” were really the only wild card and there wasn’t anything shocking or unexpected from Yellen. MBS had little to no reaction to her speech at 12:30 pm EDT.
Domestic Flavor
Jobs, Jobs Jobs: The Fed’s Research Department released their Labor Market Conditions Index (made up of 19 labor market indicators) and it fell for the 5th month down to -4.8.
On Deck for Tomorrow: Non-Farm Productivity, Unit Labor Costs and a 3 year Treasury Note auction.
The Talking Feds
Yellen is Yelling: As expected, she walked a fine line and seemed to try to caution the markets about getting too excited about the upcoming economic projections and dot plot chart that will hit next week. She said:
“Next week, concurrent with our policy meeting, the FOMC participants will release a new set of economic projections. Those could, of course, differ from the previous set of such projections in March. But speaking for myself, although the economy recently has been affected by a mix of countervailing forces, I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.”
Regarding the weak NFP report, she said, “Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report.”
Atlanta Fed President Dennis Lockhart told Bloomberg today that he still sees enough Fed meetings left in the year with enough economic data to hit to potentially still see three rate hikes but he felt more confident that there would be at least two. Asked about June…he said that it would be difficult for him to support a hike due to the uncertainty of the “Brexit” vote.
Boston Fed President Eric Rosengren still sees rate hikes on the table despite the jobs report, although June is less likely.