What happened last week?
Overview
Mortgage backed securities (MBS) lost 52 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week.
After three straight weeks of gains in MBS (lower mortgage rates), it looks as if MBS prices have “topped out” and reversed course. This was primarily due to a reduction in the uncertainty in the market place over the Brexit as Great Britain installed a new Prime Minister months ahead of when the market was expecting. This calmed markets (to a degree).
The Bank of England surprised the market by standing pat. The markets widely believed that there would be a 25 to 50 basis point cut along with some more QE. But that didn’t happen. There was only one voting member that wanted to cut by 25 basis points. The Bank of England does have another meeting in three weeks and may elect to cut at that time but now the market is pricing in only a 25 basis point cut instead of the 50 basis point cut.
In other Bexit news, Theresa May was officially installed as the new Prime Minister last week.
Domestic Flavor
Retail Sales: The June Headline number beat estimates but it’s tainted. It came in at 0.6% vs estimates of 0.2%, BUT May was revised lower from 0.5% to 0.2%…thus the larger gain in June. But when you strip out Autos, we actually do get some solid traction as it jumped 0.7% vs estimates of 0.4%.
Inflation? The June Consumer Price Index on a MOM (month-over-month) basis was in line with estimates for Core and missed by one tick for the Headline reading. But the Core YOY (which is more closely watched by the Fed) moved upward to 2.3%.
Industrial Production: Was a very solid report as once again there was strength in the manufacturing sector as this report moved from negative readings in May to +0.6% in June which beat market forecasts of 0.2%.
Treasury auctions: The 10 year note was regarded as a weak auction even though the yield was at a 4 year low. But demand was off and primary dealers had to step in and buy the bulk of the offering. The 30 year bond saw very strong demand and a low yield, which is a perfect combination.
What’s on the agenda for this week?
Overview
Last week was not a fluke, the retrenchment of MBS prices from highs on July 6th is just the beginning. Do not expect MBS to make a rebound and reclaim the lost 57BPS from last week. That pricing is gone. Our domestic data can have no influence on pricing this week and it really will be driven by overseas events. MBS is expected to be under pressure and to test the same floor of support that held Friday – so downside is limited but no upside at all today.
This is a very light week for economic data, no Treasury auctions and no Talking Feds.
Three Things
The three items that will get the most attention from long bond traders: (1) ECB Interest Rate Decision, (2) Geo-political and market fallout from Turkey, (3) Brexit news.
(1) Thursday’s European Central Bank rate decision has the greatest potential to create volatility as it’s the first one since the Brexit vote. They could cut their rate or drive their deposit rate even more negative than it is or announce more asset purchases. Or they can do what the Bank of England just did…nothing.
(2) Turkey: This is really an oil play so far as there are no disruptions of the flow of oil as they have a major pipeline there. But any spike in violence there could start to impact prices.
(3) Brexit: The bond market “cooled” a tad last week as the new PM, Bexit Czar and other cabinet positions were filled and removed some of the “unknowns”. Further progression on this front could continue to remove some of the “fear factor” premium in MBS.
Domestic Flavor
Housing: There is a lot of housing data this week with the Home Builders’ Sentiment, Mortgage Applications, Housing Starts, Building Permits, FHFA House Price Index and Existing Home Sales. The latter will get the most attention. At the end of this week, we will have a very good idea of how the housing market is doing but it will have very little impact on pricing.
Market Wrap-up
Overview
MBS were under pressure right out of the gate and were as low as -21BPS but the same exact intra-day support level that was tested on Friday held up nicely again today. While an intra-day move in WTI Oil did provide some pressure, MBS traders were gradually getting out in chunks and taking their profits…careful not to sell too much too fast as to not cause a larger decline for their remaining holdings.
Domestic Flavor
Housing: The July Housing Market Index AKA Home Builders’ Sentiment came in a 59 vs estimates of 61. Anything above 50 is a positive reading. Really a non-event.
On Deck for Tomorrow: Housing Starts and Building Permits.
Texas Tea, Black Gold
While WTI Oil is down for the day, it certainly had a good intra-day bump. It was trading at 45.01 at 10:00 am EDT and then rose to 45.40 by 12:09 pm EDT which happens to correlate exactly with MBS being under pressure after 10:00 am EDT.