What happened last week?
Overview
Mortgage backed securities (MBS) gained 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
It was a week dominated by Jobs speculation and finally data and a lot of “hawkish” Fed Speak. A hawkish tone is one that is more slanted towards tightening Fed policy and rates. In the end, the bond market remained firmly entrenched in the same trading channel that we have seen for the past couple of weeks, which is why fixed mortgage rates have been so stable lately.
The Talking Fed
Just about every Fed President had a very “hawkish” undertone to their speeches. But the bond market is fatigued by the steady stream of Fed commentary but zero action. At this point, it’s like the Fed “crying wolf” and the markets are not going to pay any attention to their commentary until they actually follow through with action that matches their words.
Richmond Fed Bank President Jeffrey Lacker (non-voting member) said that the U.S. economy appears strong enough to warrant significantly higher interest rates and that the current Federal Funds rates are too low. “It appears that the funds rate should be significantly higher than it is now,” he said in prepared remarks.
Cleveland Fed President Loretta Mester (voting member) made it clear that she certainly supports a hike in the near future. She said: “The economy is basically at full employment,” and “I do not believe that at this point in the business cycle the current very low level of interest rates is an effective solution to these longer-run issues,” and “It seems like a gradual increase from a very low interest rate that we are at now is pretty compelling to me.”
Boston Fed President Eric Rosengren (voting member) said, “A somewhat faster move to rate normalization may defer somewhat how quickly we achieve the dual mandate goals of full employment and price stability, but could reduce the risk of a larger divergence from the dual mandate in the next downturn.” He said that the Fed will likely meet its U.S. inflation and employment goals soon and should consider that quicker interest rate rises over time could stave off risks to the economy.
Federal Reserve Vice Chairman Stanley Fischer (voting member) said incoming economic data will determine the trajectory of interest-rate increases and expressed optimism that productivity growth will rebound. “The work of the central bank is never done, and I don’t think you can say ‘one and done’ and that’s it,” Fischer said, speaking Tuesday on Bloomberg Television. He also said, “We can choose the pace, but we choose the pace on the basis of data that’s coming in.”
Big Jobs Friday
If you want to comb through and read the official release, you can do so here.
Here are the key points that the news outlets are reporting on a continuous loop:
Unemployment Rate 4.9%. This is unchanged from July, the market was expecting 4.8%
August Non-Farm Payrolls 151K. The market was expecting 180K
Average Hourly Wages increased by 0.1%. The market was expecting 0.2%
The Participation Rate remained at 62.8%
Average Weekly Hours fell from 34.4 to 34.3.
How the bond market viewed this: While no one can deny that this report is lighter than expected, it actually isn’t a bad report. A couple of very important trends are still very much intact. The Non-Farm Payroll number from July was revised upward from 255K to 275K. That brings the more closely watched 3 month moving average to 232K, which is very strong indeed. Average Hourly Wages did make yet another monthly gain, this time by 0.1% to $25.73. Year-over-year, it is still comfortably above 2.0% with a 2.4% reading. And with the Fed focusing on the trend lines, this batch of data is not weak enough to stave off a rate hike, nor strong enough to guarantee one either.
What’s on the agenda for this week?
Three Things
The three events that have the greatest potential to move pricing this week are: (1) ISM Services, (2) The Talking Fed and (3) Super Mario.
(1) ISM Non-Manufacturing Services account for about 80% of our economic activity. Last week’s ISM Manufacturing report was weaker than expected and came in below the important 50.0 level but bonds largely held off any reaction as it’s just too small a piece of the pie (about 20%). This morning, the larger piece of the pie was much weaker than expected (51.4 vs estimates of 55.7). This still showed a monthly expansion but it was a big miss and has caused MBS to rally to start the week.
(2) The Talking Fed: Of note is Wednesday’s release of their Beige Book which is compiled specifically to be used in the next FOMC Meeting. It will show what all 12 districts are reporting for growth and sentiment. There are also several Talking Feds this week:
09/06 John Williams
09/07 Esther George
09/09 Eric Rosengren
(3) Super Mario: European Central Bank President Mario Draghi will not only announce their latest policy statement but also hold a live press conference. The markets are trying to figure out how they stay on target with their monthly bond purchases as they have basically maxed out the types of bonds that they can purchase unless they make some rule changes. Those rule changes (if any) are what will drive the markets.
Across the Pond
Down Under: The Aussies left their key interest rate alone at 1.5%
Eurozone: Their 2nd quarter GDP matched expectations of 0.3% as did their YOY GDP of 1.6%.
Market Wrap-up
Domestic Flavor
Economic Optimism: The September Investor’s Business Daily (IBD) business sentiment dropped from 48.4 in August down to 46.7 which was below the consensus estimates of 48.6. Anything below 50.0 is negative.
Jobs, Jobs, Jobs: The recently created Labor Market Conditions Index dropped from +1.0 in July down to -0.7 in August.
On Deck for Tomorrow: JOLTS, the Fed’s Beige Book and The Bank of Canada’s rate decision.