What happened last week?
Mortgage backed securities (MBS) lost just 1 basis point from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
Even though they were basically flat for the totality of the weekly session, there was some volatility, most notably on Friday as the long bond market initially moved higher and then much lower in reaction to Janet Yellen’s speech.
Yellen is Yelling
Fed Reserve Chair Janet Yellen said that the FOMC “continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.” She added, “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”
The Preliminary July Headline Durable Goods Orders were much stronger than expected (4.4% vs estimates of 3.5%). Stripping out the volatile Transportation sector, they were up 1.5% vs estimates of 0.4%. However, the final June reading was revised lower. There have been wild swings in the monthly releases of this data set which is more likely due to older models/formulas and target samples. There isn’t anything close to these wild swings in any other manufacturing data sets (like ISM, PMI, etc.).
New Home Sales for July were much stronger than expected, coming in at 654K vs estimates of 580K. The market was expecting a pull-back of -1.9% but instead got a gain of 12.4%. The median sales price fell to $294,600 which is most likely the reason for the gains as builders start to provide inventory in the more moderate price ranges.
Existing Home Sales for July were lighter than expected with 5.39M units vs estimates of 5.53M, not a large miss by any means. Key takeaways are that Inventory Levels remain below 5 months (4.7) and the MOM median home price dropped 1.4% to $244,100, but YOY prices are still up 5.3%. The culprit was Condo sales which dropped a massive 12.3%.
FHFA Housing Price Index for June increased by 0.2% which matched May’s rate of appreciation. It remains at a YOY rate of 5.6%. This report captures sales prices for loans funded through Fannie, Freddie and Ginny but does not cover other types of mortgages or cash purchases.
What’s on the agenda for this week?
Look for MBS to see some very small gains today and maybe through the week. However, it is expected that it will be strong enough to support a Fed move in the September meeting. Or at the very least, strong enough to cause long bond traders to put a greater probability of a rate hike at this next meeting.
The three areas that have the greatest potential to influence long bond trades are: (1) Jobs data, (2) The Talking Fed and (3) Manufacturing data.
(1) Jobs, Jobs, Jobs:
Friday’s Non-Farm Payrolls report will get the most attention. The market is expecting a reading around 180K, but if it tops 200K, then you will a migration into the September rate hike camp. But don’t forget about Average Hourly Wages which may actually carry more weight with the Fed as the year over year (YOY) wage growth was a blistering 2.6%. If they stay at that level or increase it, then it will be very negative for bonds. But this data won’t hit until Big Jobs Friday. There are actually a ton of jobs/wages data this week before Friday.
Today started off with Personal Income which rose a nice 0.4% in July, plus the June reading was revised upward. On Wednesday will be the ADP Private Payrolls report and then on Thursday the Challenger Job Cuts, Initial Weekly Jobless Claims and Unit Labor Costs. There will also be ISM Manufacturing which has an internal labor component.
(2) The Talking Fed: Last week, we heard from the three most important voting members – Yellen, Fischer and Dudley – and all three tried to make it clear to the markets that progress has been made towards the Fed’s goals and that September is very much a “live” meeting. Experts will be paying very close attention to see if the overall “hawkish” tone from last week is continued with these speakers.
This week we will hear from:
08/31 Rosengren, Kashkari and Evans
(3) Manufacturing Data: Is the economy growing? At what pace? Our manufacturing data will give us the answers. We start off with Chicago PMI which is expected to show very strong expansion with a reading over 54. Then there will be the national data with the ISM report which is also expected to be expansionary with a reading over 52. The week rounds out with Factory Orders which is forecasted to also show some decent gains.
As expected, MBS had some small gains today but they are still not expected to break out of their channel this week. It is expected that there will be a strong NFP report on Friday. Today’s economic data had really no influence on pricing, It was helped by Oil dropping and some traders buying MBS.
Personal Outlays: July Personal Income had a very solid 0.4% gain. And that is after June was revised upward to be better than expected. If June had not been revised upward, July’s reading would have been higher than the consensus estimates instead of matching them. Same story with Personal Spending as it rose on MOM basis by 0.3%.
Inflation? Well, the Fed’s key inflation benchmark – the YOY Core PCE reading remained at 1.6% which is below their “target” rate of 2.00%.
Manufacturing: Our first dose of many manufacturing data points this week, the regional Dallas Fed Manufacturing Survey decreased from July’s -1.3 down to -6.2 in August. Certainly not trending the right direction but long bonds generally are not impacted by the small regional surveys.
On Deck for Tomorrow: Case Shiller Home Price Index, Consumer Confidence.