What happened last week?
Mortgage backed securities (MBS) gained just 5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. While just 5 basis points in total net change is very small for a week, it was actually a very “choppy” session with a 63 BPS swing from best pricing levels to worst.
The bond market focused on the release of the Minutes from the last FOMC meeting as well as new speeches from Fed members which showed that managing their balance sheet is now a very serious topic and may lead to fewer Treasury and (more importantly) MBS purchases by the end of the year. The Jobs data on Friday was a mixed bag but the Unemployment Rate of 4.5% gives the Fed what they need to keep tightening this year.
Jobs, Jobs, Jobs: It finally arrived…Big Jobs Friday! But what did we learn…the headline data might not mean what you think it does.
You can read the official Bureau of Labor Statistics release here.
The Tale of the Tape:
-March Non Farm Payrolls (NFP) came in at 95K vs estimates of 180K.
-February NFP was revised lower from 235K down to 219K.
-January NFP was revised lower from 238K down to 216K.
-The more closely watched (by the Fed) rolling 3 month average is now 178K.
-Average Hourly Wages MOM were basically in line with estimates, 0.2% vs estimates of 0.2% TO 0.3%.
-The YOY Average Hourly Wages came in at 2.7% vs 2.8% in February…still well above the 2.5% level that is considered very inflationary.
-The Unemployment Rate fell to 4.5% vs estimates of 4.7%. The Fed (Yellen) was basically saying that 4.7% was “at or near full employment,” so now that we have dropped even lower than that, the Fed has what it needs from employment regardless of NFP levels.
The Talking Fed
The Minutes from the last FOMC meeting were released. You can read them here.
The bond market focused on the discussion surrounding their balance sheet. Here are few key points:
– “Many participants emphasized that reducing the size of the balance sheet should be conducted in a passive and predictable manner. Some participants expressed the view that it might be appropriate for the Committee to restart reinvestments if the economy encountered significant adverse shocks that required a reduction in the target range for the federal funds rate.”
– “An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet. To promote rapid normalization of the size and composition of the balance sheet, one participant preferred to set a minimum pace for reductions in MBS holdings and, if and when necessary, to sell MBS to maintain such a pace.”
-NY Fed President William Dudley (voting member) said that it was entirely “appropriate” to take a look at curbing the “Volker” rule and severity of the financial stress tests.
-S.F. Fed President John Williams (non-voting member) said it may take the U.S. central bank around five years to shrink its balance sheet to a more normal size once that process gets underway.
What’s on the agenda for this week?
IF Janet Yellen shed more light/momentum on the timing and scope of pulling back on asset purchases, MBS may sell off in later trading. MBS will have no reaction to the two biggest economic releases of the week (Retail Sales, CPI) because the bond market will be CLOSED that day. From a technical perspective, MBS are in a lower channel than last week and should remain there unless there is a lot of Geo-Political friction which is a wild card.
The three things that could have the greatest impact on your backend pricing this week are: (1) The Talking Fed, (2) Geo-Political and (3)Domestic Flavor
(1) The Talking Fed: MBS traders are trying to get a better sense of the timing and mix of the Fed reducing the amount of their MBS purchases each week. To that end, experts will be focusing on Janet Yellen’s speech today at 4:10 EST at the University of Michigan.
St. Louis Fed President James Bullard spoke in Australia and said that the Fed should not be in a rush to raise rates but instead end their balance sheet reinvestment.
Here is the Fed’s schedule this week:
04/10 James Bullard, Janet Yellen
04/11 Neel Kashkair
04/12 Atlanta Fed Business Inflation Expectations
04/13 Fed’s Balance Sheet
(2) Geo-Political: There are several key stories. France will have a round of voting to narrow the presidential field. The more votes that Le Penn gets, the better it is for MBS as traders are concerned that she (and other right wing contenders) would lead France to leave the EU (similar to the Brexit).
Syria and the U.S. will continue gain attention as tensions mount among Russia, Iran, Syria and the U.S.
Tensions with North Korea and trade negotiations with China will also get a lot of attention.
(3) Domestic Flavor: The most important releases won’t hit until Friday, and the bond market is closed that day. Retail Sales, PPI and CPI will get the most attention from long bond traders.
Treasury auctions this week:
04/10 3 year note
04/11 10 year note
04/12 30 year bond (most important)
It was a nice and calm open to the week. As expected, MBS have done nothing leading up to Yellen’s comments.
Jobs, Jobs, Jobs: The newly created Labor Market Conditions Index continues to provide no real value as an index. It came in at 0.4 in March. The February reading originally was released at 0.6 and was basically revised upward by 300% to 1.5.
Treasury Auctions: With today’s short term 3 year note, $24 billion went off at a high yield of 1.525% which is better than last month’s 1.630% but demand slipped as the bid-to-cover ratio slipped from 2.74 to 2.62 which is the lowest level of demand this year. This auction had zero impact on MBS pricing today.
On Deck for Tomorrow: FNMA Coupon Rollover, JOLTS and our 10 year Treasury note auction.
The Talking Fed
Federal Reserve Chair Janet Yellen spoke at the University of Michigan. She gave some general background about the Fed and its role…analysis to come later.
St. Louis Fed President James Bullard spoke in Australia and said that the Fed should not be in a rush to raise rates but instead, end their balance sheet reinvestment.