What happened last week?
Mortgage backed securities (MBS) gained just 9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week. But we certainly had some volatility as MBS had a -42 BPS spread between the best pricing of the week (lowest rates) and the worst pricing of the week (higher rates).
The 3rd quarter is in the bag, and benchmark MBS gained just +21BPS over a 3 month period. A very narrow range indeed as mortgage rates were very stable during that period.
There was a slew of big name domestic data points that were overall stronger than expected with terrific consumer, manufacturing and income readings. OPEC was the biggest international event of the week.
Personal Outlays: The one area of our economy that shows steady inflation (wages) continues its upward trend as Personal Income for August increased yet again. This time by 0.2% as this has increased each and every month this year. The market was expecting 0.2%. But despite monster Consumer Confidence readings and steady increases in wages, Personal Spending was flat at 0.0% which was just a tick below the consensus estimates.
Consumer Confidence: The September reading was a blockbuster at 104.1 which was much stronger than the estimates of 99.8. Plus, August was revised upward from 101.1 to 101.8. The September reading is the highest level in almost a year.
Consumer Sentiment: The University of Michigan’s Consumer Sentiment Index (final for September) was better than expected (91.2 vs estimates of 90.0) in yet another report that shows consumers have a good outlook on the future.
GDP: For the third time, we have had to digest the Gross Domestic Data for the 2nd quarter. And this time, it was revised from 1.1% up to 1.4% which was higher than expectations calling for a revision to 1.3%. The QOQ Core PCE was 1.8% but the Fed actually uses the PCE report as their basis for inflation.
Durable Goods Orders: This report has seen some wild swings over the past year. Today’s release showed that the headline August data was flat at 0.0%. But that was a fairly nice beat over forecasts of -1.4%. July was revised lower from 4.4% down to 3.6%. When you strip out the transportation sector, it fell 0.4% which matched market forecasts. Core Capital Goods Orders (which are nondefense excluding aircraft) improved by a nice 0.6%.
Texas Tea, Black Gold
The markets are still VERY skeptical that the fragile “agreement” will turn into official policy in November but are encouraged that they at least reached a consensus for the first time in 8 years. But news “snippets” of OPEC members like Iraq saying that they can’t agree to the terms because the production freeze is based upon a “current” production level that is far below what Iraq is actually producing, has kept many investors from bidding up. Oil could exceed its 2% inflation target.
What’s on the agenda for this week?
MBS are expected to trade in a very narrow range until Friday (the exception is Wednesday’s ISM Non Manufacturing report). For MBS to make a run at better pricing on Friday there needs to be: (1) NFP for September below 150K AND August revised lower, and (2) Average Hourly wages YOY to fall from 2.4% to below 2.0%. That is a very tall order and flies in the face of all previous economic and labor data over the past two months.
The three things that have the greatest ability to influence pricing this week are: (1) Jobs, Jobs, Jobs, (2) Manufacturing/Services and (3) The Talking Fed.
(1) Jobs, Jobs, Jobs: There is a glut of jobs-related data this week culminating in Big Jobs Friday. Very close attention will be paid to Average Hourly Wages (currently at +2.4% on a YOY basis) and the Non-Farm Payroll (NFP) data. The reading for September is probably not as much of a factor as the revisions to the prior months. August was reported at only 151K but there have been significant revisions to Augusts in the past due to seasonal adjustments.
(2) Manufacturing: After last week’s better than expected Chicago PMI, will there be a strong round of data this week? So far, yes. The ISM Manufacturing report was a very solid 51.5 vs estimates of 50.3 and proved that August’s 49.4 was a fluke and not a trend. The Markit PMI report showed a slight improvement from August (51.5 vs 51.4). There will also be Factory Orders this week. But the focus of bond traders will be on Wednesday’s release of the ISM Services sector with accounts for 75% to 80% of our economic output.
(3) The Talking Fed: There will be a steady stream and the markets will be taking their comments and the Jobs data on Friday to hedge ahead of the November and December FOMC meetings.
10/04 Lacker and Evans
10/05 Kashkari and Lacker
10/07 Fischer, Mester, George and Brainard
MBS were under pressure right out of the gate, and the stronger than expected ISM data ensured they would be in the red today. But the intra-day channel was tested and held nicely.
Manufacturing: The ISM Manufacturing index followed the tone set by the Chicago PMI report and was hotter than expected (51.5 vs estimates of 50.2). This means that the August contractionary reading of 49.4 was a “one off” and not the start of a downward spiral.
Housing: The Construction Spending report disappointed (-0.7% vs estimates of 0.3%). Of that, construction spending for the most important segment (SFR) dropped 0.9%.
Auto Sales: Warm pulse? You are approved! Yes subprime auto loans are no problem and have driven (pun intended) total vehicle sales through the roof with 17.76M units which was hotter than the optimistic estimates of 17.3M. It’s funny how a subprime loan on an asset that loses value each month is perfectly fine (thanks to the powerful auto lobby) but an equity based subprime loan on real estate that’s worth more each month? Not allowed.
The Talking Fed
Cleveland Fed President Loretta Mester said that the U.S. Federal Reserve should not delay in raising interest rates in order to keep up with the economy and that she would support a modest rate hike at the November meeting.