What happened last week?
Mortgage backed securities (MBS) gained 29 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week.
Overall, our domestic economic data was fairly strong and showed both growth and inflation, both of which are generally negative for bonds and interest rates. However, offsetting that was the fact that Great Britain officially evoked “Article 50” which officially starts the break-up process from the European trade union (they were never a part of the Euro currency). The unknown impact of this event on the future of the European Union and the global economy has provided support for long bonds as global investors pour their funds into low yield (but high safety) U.S. bonds which helps keep our rates low.
MBS bounced within the boundaries as they sold off at the top of the channel and rallied at the bottom of the channel.
Inflation? It’s heeeere. Headline Personal Consumption Expenditures (PCE) Year-over-Year (YOY) is finally back above 2.0% for the first time since April 2012. It came in at 2.1% which matched market expectations. When you strip out food and energy and look at the Core PCE YOY it moved up to 1.8% which was higher than the market forecasts of 1.7%.
Income and Spending: Personal Income continues to make gains as it rose 0.4% in February, plus January was revised upward from 0.4% to 0.5%. Spending increased by 0.1% which was shy of market forecasts of 0.2%.
Chicago PMI: Hit its highest level since January 2015 with a blockbuster reading of 57.7 in March. This is stronger than the forecasts of 56.5. Any reading above 50 is expansionary and reading above 55 is very hot.
Consumer Sentiment: The University of Michigan’s final reading for March was revised from the initial release of 97.6 down to 96.9. However, it remains the fourth highest reading in 10 years.
Gross Domestic Product: The third and final revision to the 4th quarter GDP was revised upward from 1.9% to 2.1%. This was driven by an increase in Consumer Spending which jumped 3.5% in the 4th quarter and follows a 3rd quarter gain of 3.0%, so spending is showing good strength.
What’s on the agenda for this week?
Despite strong ISM, MBS are still treading water which says that there is a ton of safety buying due to concerns overseas still. While that means good pricing it also means a reversal is coming. For the week, it will take Average Hourly Earnings YOY to drop below 2.5% for a sustainable (multi-week) rally. But if that moves from the current level of 2.8 to 2.9 or 3.0, then the bond market will begin to price in another Fed rate hike.
The Three Things that have the greatest ability to impact your back-end pricing this week are: (1) Jobs, Jobs, Jobs, (2) Geo-Political and (3) The Talking Fed.
(1) Jobs, Jobs, Jobs: It’s a new month which means Big Jobs Friday. While the Non-Farm Payrolls (estimated to hit 185K) and the Unemployment Rate (estimated to remain at 4.7%) will get all of the headlines, it is the Year-Over-Year Average Hourly Wages that will get the most attention from MBS traders. Last time around it rose to 2.8% which is very high indeed. If that moves to 2.9% or even 3.0%, MBS will sell off even if there is a downside miss to the NFP report.
(2) Geo-Political: The biggest event to watch is Friday’s meeting with China’s president Xi Jinping in Florida. Experts will be watching for either more friction or softening between the U.S. and Chinese leaders in terms of trade and currency.
The bond market continues to price in risk for the French election as well and shifts in polling data will have an impact in pricing.
(3) The Talking Fed: Wednesday’s release of the Minutes from the last FOMC meeting where they raised rates will be very key as well will speeches this week:
04/03 William Dudley, Patrick Harker and Jeff Lacker
04/04 Daniel Tarullo
04/05 FOMC Minutes
04/06 John Williams
There was very strong domestic data to kick off the week which would normally pressure MBS but it was the “dovish” Fed to the rescue along with yet another Republican “whiff” that has traders concerned that none of Trump’s stimulative measures will ever get through.
Manufacturing: The March ISM Manufacturing Index had its 94th straight expansionary reading. It just edged out market expectations with a 57.2. The new orders component hit 64.5 which is the second best reading since 2013. Prices paid jumped to 70.5 vs estimates of 66.
Construction Spending: February’s reading of 0.8% was just shy of market expectations of 1.0% but January was revised upward significantly from -1.0% to -0.4%.
Vehicle Sales: Were at lofty levels but were disappointing compared to recent records. The March reading hit 16.62M which was almost 1M short of expectations (17.50M).
On Deck for Tomorrow: Trade Balance and Factory Orders.
The Talking Fed
New York Fed President William Dudley (voting member) said that growing U.S. student loan debt is one headwind to overall economic activity and, on the margins, pushes down the level the Federal Reserve is targeting for equilibrium interest rates.
Philly Fed President Patrick Harker (voting member) said, “I don’t want to get behind the curve, but I don’t think we need to rush, either,” in regards to interest rate hikes.
Republicans “whiff” again as Democrats amassed enough support to block a Senate confirmation vote on President Trump’s Supreme Court nominee, Neil Gorsuch.