What happened last week?
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.
It was all Brexit, all the time last week as the financial markets shifted risk ahead of the unknown ripple effect of the vote.
The stock market (as measured by the DJIA) was at 17,780.83 on June 22 which was the day before the voting started in Great Britain. After the results were known, it sold off dramatically. However, by Friday July 1, the DJIA closed at 17,949.37. So the stock market had a wild ride but has righted itself and is actually at levels that are higher than before the Brexit vote.
But it is not stocks that drive mortgage rates but rather bonds. And it is “risk off” in the global markets. A great example of this is the German 10 year Bund. It turned negative right after the Brexit vote and has remained negative since then (currently at -0.157%). What that means is that there is so much fear in Europe that major institutional investors are willing to PAY to buy Germany’s debt. Our own 10 year Treasury Note hit intra-day all time lows last week as well. And both of those have factored into the large improvement in MBS prices.
Overshadowed by all of the Brexit news and consternation was that fact that there was some fairly decent domestic economic news last week:
Manufacturing: The June Chicago Purchasing Manager’s Index (PMI) jumped to 56.8 easily crushing the forecasts of 50.5 and was our best reading since January 2016. Any reading above 50 is expansionary and a reading above 55 is simply red-hot. The June ISM Manufacturing report showed that manufacturing on a national level is red hot with a 53.2 reading which far outpaced the market expectations of 51.5. This would normally be a huge negative for MBS.
Consumer Confidence: The June reading jumped to a robust 98.0 which was much stronger than market forecasts calling for 93.3 and a big jump from May’s 92.6.
Personal Outlays: Personal Spending matched market expectations with yet another monthly gain, this time 0.4%. Personal Income also continued their MOM gain trend, with a gain of 0.2% which was just off of the estimates of 0.3%. But it would have been dead-on if April hadn’t been revised upward to 0.5%. Core PCE on a YOY basis remained at 1.6% which is still well below the Fed’s target rate of 2.0%.
GDP: We have seen this before. Literally. This is the 3rd time that the 1st quarter GDP has been released and it has been massaged upward each time. This time, it was revised upward from 0.8% up to 1.1% which was stronger than market expectations of only 1.0%. Mortgage backed securities gained 31 points (BPS) from Wednesday’s close which caused fixed mortgage rates to move lower for the session.
What’s on the agenda for this week?
We are seeing fresh low yields in our U.S. 30 year Treasury Bond and MBS are certainly benefiting from that as bonds are rallying after the BofE announced a reduction in capital reserve requirements for their banks (which is stimulative for their economy but bond traders view it as them acknowledging a potential recession). Italy’s bailout of their 3rd largest bank is also helping our bonds. Look for a +20 to +30BPS improvement in pricing today, but I would protect my pipeline after that.
The Big Three
The following three events will have the most impact on MBS pricing this week:
(1) Central Bank Palooza:
This week’s trading session opened with the Bank of England’s Governor Mark Carney making some policy moves. He dropped the capital buffer rate for their banks down from 0.5% t0 0.0%. This means that they have to hold less capital in reserves and will presumably lend it out to businesses to provide some economic momentum.
ECB have a non-monetary policy meeting on Wednesday but the markets will be paying close attention to ECB President Mario Draghi’s speech.
The Talking Fed: We will get the minutes from the last FOMC meeting on Wednesday. This is not likely to be a big market mover though as this meeting was before the Brexit vote and all we will find out is that the Fed was not willing to make a move with that unknown hanging over their heads. So instead the market will be focusing on post-Brexit commentary from this week’s Talking Feds:
07/05 William Dudley
07/06 William Dudley, Daniel Tarullo
(2) Jobs, Jobs, Jobs:
There is a glut of jobs related data this week which include ADP Private Payrolls, Challenger Job Cuts, Initial Jobless Claims, Continuing Claims, Non-Farm Payrolls, Unemployment Rate and Average Hourly earnings. The bond market will focus the most on Avg. Hourly Earnings as the last reading showed a 2.5% YOY gain. Also of interest will be the revision to last month’s laughably inaccurate release of 38K.
(3) ISM Non-Manufacturing:
There was some very robust manufacturing data last week (Chicago PMI and ISM) but that only represents about 20% of our economy. This week’s ISM Non-Manufacturing report addresses the services sector which accounts for the biggest part (80%) of our economy. The market is expecting a strong reading.
Overall, a pretty boring session that saw a rise to MBS pricing due to falling WTI Oil prices and fresh new lows in our 30 year Treasury bond yields.
Factory Orders: The May reading pulled back from April’s downwardly revised 1.8% down to -1.0%. But that is exactly what the market expected. Not really a factor in pricing today.
Texas Tea, Black Gold: WTI Oil Prices fell 4.61% as the U.S. officially (and for the first time ever) has more oil supply on hand than Saudi Arabia has; too much supply, it seems, as oil sold off as a result.
On Deck for Tomorrow: ADP Private Payrolls, Trade (I’m)Balance, ISM Non-Manufacturing and the FOMC Minutes.