What happened last week?
Mortgage backed securities (MBS) lost 21 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.
It was a very choppy session with MBS selling off Monday through Wednesday on very strong domestic economic data (ISM Manufacturing and Non-Manufacturing) and then sharp gains on Thursday due to the Bank of England action, only to be reversed with a sharp sell-off on Friday due to strong jobs data.
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.
Services: The July ISM Non Manufacturing index was very strong with a 55.5 reading which was very close to estimates of 55.8. Anything above 50 shows a month-over-month expansion in the services sector which accounts for 80% of our economy.
Jobs, Jobs, Jobs: It was BIG Jobs Friday:
– Non-Farm Payrolls for July 255K vs estimates of 180K
– Non-Farm Payrolls for June revised upward from 287K to 292K
– Non-Farm Payrolls for May revised upward from 11K to 22K
– Non-Farm Payrolls 3 month rolling average is now 190K
– Average Hourly Wages showed strong pressure on labor costs, moving up 0.3% vs June’s level of 0.1%. YOY Average Hourly Wages are at 2.6%
– The Unemployment Rate remained at June’s level of 4.9%, the market was anticipating a small improvement to 4.8%
– The Participation rate improved from 62.7% in June to 62.8% in July which is why the Unemployment Rate did not decrease
– The Average Hourly Work Week increased to 34.5 hours and overtime increased. Both are signals that the labor market is tight
More Highlights: Professional and business services added 70,000 jobs in July and has added 550,000 jobs over the past 12 months. Within the industry, employment rose by 37,000 in professional and technical services in July, led by computer systems design and related services (+8,000) and architectural and engineering services (+7,000). Employment in management and technical consulting services continued to trend up (+6,000). In July, health care employment increased by 43,000, with gains in ambulatory health care services (+19,000), hospitals (+17,000), and nursing and residential care facilities (+7,000). Over the past 12 months, health care has added 477,000 jobs. Employment in financial activities rose by 18,000 in July and has risen by 162,000 over the year.
Across the Pond
Great Britain: As expected, the Bank of England took action and lowered their key interest rate for the first time since March 2009. They cut 25 BPS to lower the rate to 0.25%. The rate move was a unanimous vote. In addition:
– They expanded their QE by 60 billion to bring the total to 435 billion pounds. The vote was 6-3 on this item and it was a bit of a surprise to the markets.
– Up to 10 billion of the new QE may now be used to purchase corporate bonds which is also a new move. The vote was 8-1 on that item.
– They lowered their outlook (due to the Brexit) from 2.3% GDP in 2017 down to 0.8% but do not see a recession.
What’s on the agenda for this week?
This week the market will either begin to start hedging for an increased chance of a September rate hike or not. This will be reflected in this week’s global Treasury auctions and MBS which will be highly reactive to inflationary and manufacturing data out of China and Germany. It will take much weaker data overseas for MBS to make any gains this week. With WTI Oil making a comeback, it’s a threat to pricing.
The three items that will have the greatest potential to drive interest rates (bond prices) this week are: (1) global economic data, (2) a glut of debt hitting the market, and (3) domestic economic data.
(1) Global Economic Data: This week will be both PPI and CPI out of China as well as Retail Sales and Industrial Production. Out of Germany, will be CPI, 2nd quarter GDP, and Industrial Production.
(2) A Glut of Debt – Treasury Auctions this Week: How will the market do, absorbing so much long term debt all at once?
08/09 U.S. 3 year note, Great Britain 30 year bond
08/10 U.S. 10 year note, Germany 10 year bond
08/11 U.S. 30 year bond, Great Britain 10 year bond
(3) Domestic Economic Data: The biggest report of the week will be Friday’s Retail Sales data. But also of note are Unit Labor costs, Wholesale and Business Inventories, PPI and Consumer Sentiment.
Texas Tea, Black Gold
WTI Oil was briefly under $40 two weeks ago and now is above $42.60. While there is still an oversupply of oil and economists’ models showing a global slowdown which will cause a higher oversupply, this is being offset by some OPEC members calling for a restraint in output. This is giving oil a lift. If it breaks above $44, then it will pressure MBS pricing.
As expected, MBS have moved in a very narrow range. There were no major economic releases today. Oil did provide some downward pressure but the support level has held. It will take much weaker data overseas for MBS to make any gains this week. WTI Oil making a comeback is a threat to pricing.
Jobs, Jobs, Jobs: The recently created Labor Market Conditions Index came in at 1.0%. To put that in perspective, the June reading was -1.9% and since then, there have been two very strong months for labor (June NFP 292K and July NFP 255K) so June’s negative LMCI was a joke as far as predicting labor trends. And that June reading of -1.9 has now been revised upward to -0.1.
Texas Tea, Black Gold: WTI Oil futures moved up 2.92% to $43.02. Prices are rising (even though there is currently a huge oversupply) on speculation that OPEC (and Russia) will finally agree on production caps.
On Deck for Tomorrow: NonFarm Productivity, Unit Labor Costs, Wholesale Inventories and a 3 year Treasury note auction.