What happened last week?
Mortgage backed securities (MBS) lost just 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. The market saw its lowest rates on Monday and its highest rates on Tuesday.
With just a two basis point change for an entire week, MBS were trapped in a fairly narrow range. There was a mixed bag of economic data with a weaker than expected 1st quarter GDP report but very strong manufacturing and consumer sentiment readings. The Trump administration avoided a government shutdown and released some “core principals” in the form of a tax plan outline but the markets are awaiting more granular details that we won’t see until June.
GDP: We got the first glimpse at the first quarter Gross Domestic Product and it was a very mixed bag. If you look at the headline GDP reading it fell short of expectations (0.7% vs estimates of 1.1%). But the Prices Paid PPI jumped to 2.2% vs estimates of 2.0%, the Employment Cost Index was also higher than expected (0.8% vs estimates of 0.6%) and PCE (QoQ) was 2.4% vs estimates of 2.3%). So, by every metric other than the headline reading, this was stronger than expected as far as inflation/wages. Historically, the final reading is always higher than the preliminary reading so it is very probable that when the smoke clears that this reading is back closer to 1.0%. Still fairly tame though.
Chicago PMI: The April reading was much higher than expected (58.3 vs estimates of 56.4) and was the highest reading since January 2015.
Consumer Sentiment: The final reading for April (mid-month reading was 98) came in at 97 vs estimates of 97.9. This is the second best reading of the year and very solid.
Pending Sales: Were a little better than expected for March, falling -0.8% vs a larger pull backed expected of -1.0%.
Durable Goods: This report has been all over the place and it was another mixed reading. The March headline reading missed expectations (0.7% vs estimates of 1.2%), but more than offsetting that is the upward revision to February from 1.7% to 2.3%. Same story with Transportation stripped out; it missed with a reading of -0.2% vs estimates of 0.4%, but Feb was revised upward from 0.4% to 0.7%.
What‘s on the agenda for this week?
This is a very big week with the “three things” but while MBS will continue at very elevated levels, the upside is limited to nil unless there is a complete shock to the system by the Fed and that isn’t their way of doing things. So, great pricing this week with the potential for a small pull back but there is great support as well.
The three items that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Jobs, Jobs, Jobs and (3) Political.
(1) The Talking Fed: The Federal Reserve Open Market Committee starts two days of meetings on Tuesday that will culminate with their interest rate decision and policy statement. This meeting does not have a live press conference with Janet Yellen nor the release of their “dot plot chart.” Overall, the FOMC governors and district presidents have been fairly “hawkish” as collectively they are telling the markets that 2 more rate hikes AND a tapering of MBS purchases in the 4th quarter is what they expect unless the economy tanks between now and the end of the year. But the market is not buying any of it with a zero percent chance of a rate hike priced in for this week’s meeting and only a 50/50 shot of a hike at June’s meeting.
(2) Jobs, Jobs, Jobs: There is a bunch of wage and labor related data this week which include: Personal Income, ADP Private Payrolls, Challenger Job Cuts, Unit Labor Costs and some internals from ISM data. But it’s Big Jobs Friday that will wag the dog’s tail. Of interest to the marketplace is not so much this month’s Non-Farm Payroll (NFP) reading but more so the revision to last month’s 98K reading. The biggest focus will be on wages with the monthly change in average hourly wages.
This category continues to provide the most support for pricing.
Domestically, a government shutdown was averted on Friday with a last-minute stop-gap measure that was supposed to last a week. Now there is an agreement on a $1T spending bill that will keep our government open until October 1. It’s a really bad deal as it is once again not based upon a comprehensive budget and reform but rather, arm twisting and an extension based upon political expediency and not fundamentals. We may see the Republicans make another run at health care reform.
Across the Pond
The French elections are fast approaching as May 7th is right around the corner.
North Korea says it will continue to conduct atomic tests.