What happened last week?
Mortgage backed securities (MBS) gained 57 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week and ended three straight weeks of selloffs.
There was a mixed bag of economic data with weaker than expected GDP and Durable Goods order data but stronger than expected Consumer Confidence and Chicago PMI, the latter being more current data. There was also a Federal Reserve meeting that sent the same old mixed signals. As a result, MBS rallied which drove mortgage rates lower.
Durable Goods Orders: This was a dismal report. The Headline data showed a contraction of -4.0% which was far below the consensus estimates of -1.1%. When you strip out the volatile Transportation sector, it shrank -0.5% vs estimates calling for a gain of +0.3%.
Consumer Confidence: Was much higher than expected (97.3 vs estimates of 95.7) and shows a very limited impact of the Brexit vote among domestic consumers and bodes well for spending levels.
Manufacturing: The July Chicago PMI was very strong, coming in at 55.8 which was higher than market forecasts of 54.0. Any reading above 50 is expansionary.
The Talking Fed: You can read the official release here.
Really, this was a much more “Hawkish” tone than the last Fed meeting but the market wasn’t buying any of it.
Hawkish (we get a rate hike this year):
– Esther George wanted a rate hike now instead of waiting longer
– Near Term Risks to economic outlook have diminished
– Job market strengthened
– Economy expanding at a moderate rate
– Household spending growing strongly
Dovish (no rate hike until December or 2017):
– Business investment is soft
– Economy to evolve in a way that warrants gradual hikes
What’s on the agenda for this week?
The three things that have the biggest potential to impact long bonds this week: (1) Jobs data, (2) European Central Bank Palooza and (3) Oil.
(1) Jobs, Jobs, Jobs: There is a glut of labor data this week with ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Personal Income and some internal data with our ISM releases. But Friday’s Non-Farm Payrolls (NFP) will get the most attention. Anything above 170K and/or Average Hourly Wages YOY above 2.5% will keep the possibility of a September rate hike alive.
(2) European Central Bank Palooza: The market is expecting new stimulative measures out of Japan tomorrow morning, and on Thursday will be the Bank of England’s rate decision. The market has priced in a 100% chance of a rate decrease by the BofE but they left rates alone in July and this could be a wild card.
(3) Oil: Due to a big oversupply and new rigs coming back online, WTI Oil “tanked” last week and is under pressure once again as it appears it might test the $40 level again. The lower this goes, the better it is for MBS pricing.
The Talking Fed
Overnight there were two notable Talking Feds:
Federal Reserve Dallas President Robert Kaplan said a rate increase at the next policy meeting in September is still possible. He said, “September is very much on the table but I think we’ll have to see how events unfold and so it’s too soon to jump to a conclusion,” and “We still believe the consumer will be strong in 2016, but it makes us also be very watchful for the next number of data releases to see what trend we’re on.”
Federal Reserve New York President William Dudley also sees at least one rate hike this year. He said, “It is premature to rule out further monetary policy tightening this year,” and “If the incoming information validates my view of the outlook, then I believe that U.S. monetary policy will likely need to move at a faster pace than implied by futures prices towards a more neutral posture as the labor market tightens further and U.S. inflation rises.”
ISM Manufacturing: Just like Friday’s robust Chicago PMI data, the July national ISM Manufacturing reading was very strong, coming in at 52.6 vs estimates of 53.0. It was the second highest reading since August of 2015.
Construction Spending: The June reading was a big miss (-0.6% vs estimates of +0.5%) but May’s data was upwardly revised from -0.8% up to only -0.1%. If it weren’t for this revision, then June’s data would have been in the black.
MBS have been squeezed into a narrow range that has seen terrific support due to WTI Oil falling below $40 and downward pressure due to: (1) strong domestic Manufacturing data, and (2) the two Talking Feds that are yammering about rate hike(s) being something that is not a myth but that could actually exist outside of the world of Hobbits and Wizards.
Texas Tea, Black Gold: WTI Oil continued last week’s sell off and has broken below $40 (currently 39.94) and is down -3.99% for the day. This has provided positive support for MBS.
On Deck for Tomorrow: Japan’s latest easing?, Personal Income, Personal Spending, Core PCE YOY and Total vehicle sales.