What happened last week?
Mortgage backed securities (MBS) gained just 6 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
Texas Tea, Black Gold
Oil has had a larger impact on MBS trades as low oil prices signal no inflation (and no rate hike) while rising prices can pressure inflation and give the Fed an opening to raise rates. Last week, WTI Oil rose from $41.99 on Monday and closed at $44.69 on Friday. This rise in prices provided some significant headwinds for MBS trades.
The biggest report of the week was a mixed bag at best. Certainly the July readings were weaker than expected with the Headline MOM reading flat vs expectations for a nice 0.4% gain. But June was revised from 0.6% to 0.8%…so if it were not for the upward revisions to the baseline, Retail Sales would have been in the +0.2% range…still half of expectations. When you strip out Autos, then you really see where the weakness is. Ex-Autos, the July reading was -0.3% vs expectations of +0.2%. But it’s another case where the prior month (June) was revised upward 0.7% to 0.9%. So, if June wasn’t revised upward, this might have come in around -0.1%…still falling shy of expectations but not as bad as the printed reading would suggest.
Jobs, Jobs, Jobs
The June Job Openings and Labor Turnover Survey (JOLTS) was a little better than expected (5.6M vs estimates of 5.52M). With that many unfilled jobs, there is plenty of room for more NFP gains of close to 200K without any problem.
Small Business Optimism
The NFIB Index for July improved to 94.6 which was higher than forecasts calling for 93.2 and was the fourth straight monthly increase. Plans to add more employees rose 1 point to 12 and expectations that the economy will improve increased by 4 points.
The IBD/TIPP Economic Optimism reading for August was stronger than expected, hitting 48.4 vs estimates of 46.2 and a big improvement over June’s 45.5 reading.
Across the Pond
China: While the U.S. is posting 0.0% gain in Retail Sales, China’s reading hit 10.2%, but this was a little lighter than forecasts calling for 10.5%.
Germany: Their 2nd quarter GDP was double market expectations (0.4% vs estimates of 0.2%) and on YOY basis, their GDP was 3.1% vs estimates of 1.5%. Very strong data.
Eurozone: Their 2nd quarter GDP matched expectations of 0.3% and on a YOY basis it was -0.7%, but that is twice as good as the market expectations of -1.5%
What’s on the agenda for this week?
Until Wednesday’s release of the FOMC Minutes, MBS will move in lock-step with WTI Oil Prices which are currently rising and will need to be watched carefully. The higher they go, the worse it is for MBS pricing.
The three things that will have the most influence on MBS trades this week are: (1) Oil, (2) The Talking Fed and (3) Domestic Flavor.
(1) Oil: WTI rose $3.60 last week and closed above an important level at $44 and is now making its way towards $45 (currently $44.70). If it cracks above $46, it could be very negative for pricing.
(2) The Talking Fed: There are a few speeches this week with a lot of focus on the minutes from the last FOMC meeting. Next week Janet Yellen et al will be at the Jackson Hole, WY Symposium.
08/16 Dennis Lockhart
08/17 Atlanta Fed Business Inflation Outlook, James Bullard and the FOMC Minutes
08/18 John Williams
(3) Domestic Flavor: There are very few releases this week that have the ability to move the needle on pricing. Consumer Price (Core) YOY is the only report that could cause any volatility. It has been at 2.3% the last couple of releases. It would need to creep towards 2.5% for MBS to feel any pain.
MBS started in a locking bias, concerned about oil. WTI has gained another 3% today but is still below $46 which has kept MBS just barely above the intra-day support level. There were two very low level domestic reports which had no influence on pricing today.
Housing: The August National Association of Home Builders’ Housing Market Index rose 2 points from a revised July reading of 58 to August’s 60. It’s the second time this year that it has hit 60. Overall a strong report with gains in present and future sales but a little weakness in traffic.
Manufacturing: The regional NY Empire Manufacturing report for August was weaker than expected (-4.21 vs estimates of 2.50). This region has had poor performance for a long time with a nice surprise into positive territory in July, but it’s right back into negative territory again.
On Deck for Tomorrow: CPI, Housing Starts, Building Permits, Industrial Production and Capacity Utilization.
Texas Tea, Black Gold
WTI had another winning day, up 2.9% to $45.78 and has provided some steady headwinds for MBS all day long.
Across the Pond
Japan: Saw some better than expected data (for a change) as Industrial Production MOM shot up 2.3% which is very strong. This made the YOY number move from -1.9% to -1.5%