What happened last week?
Mortgage backed securities (MBS) lost just 13 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 Wednesday and its highest rates on Thursday.
It was another tight week with very minimal movement in long bond trades. Domestically, the two biggest events were Wednesday’s Federal Reserve policy statement and Friday’s Jobs data. Internationally, we saw falling oil prices and hedging ahead of the important French presidential election.
The Talking Fed
The Federal Reserve concluded two days of meetings and made no policy changes. You can read the official FOMC statement here.
Depending on your own perspective, you saw it as either “dovishly hawkish” or “hawkishly dovish.”. The bond market took a while to react but did make a very small move lower as a result of building in a higher probability of a June rate hike.
Here are some of the most notable changes (in bold) from their last FOMC statement:
• “Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed.”
• “Job gains were solid, on average, in recent months, and the unemployment rate declined.”
• “Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid.”
The Fed commented that inflation is reaching its goal:
• Inflation measured on a 12-month basis recently has been running close to the Committee’s 2% longer-run objective.
On the very weak 1st quarter GDP:
• The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2% over the medium term.
Jobs, Jobs, Jobs
Big Jobs Friday came and went and it was a “mixed bag” of data. To be sure, just about every metric is better than the weak March report…so there is real growth. The problem is that it was not stronger than market expectations and not strong enough to ensure a Fed rate hike in June.
Tale of the Tape
• April Non-Farm Payrolls (NFP) were higher than the consensus estimates (211K vs estimates of 185K); however, the “whisper” numbers that traders had baked in were closer to the 220K level.
• March NFP was revised lower from 98K down to 79K.
• Feb NFP was revised higher from 219K up to 232K.
• The rolling three month average is a respectable 174K now.
• Unemployment Rate (U3): The market was expecting this to move higher from March and it actually dropped to 4.4% vs estimates of 4.6%. This is now the lowest reading since April 2007! And while much of that decrease was due to people going back to work, it was also helped out by a falling Participation Rate which dropped to 62.9%.
• Wages are a key focus and the MOM reading matched market expectations of a very solid gain of 0.3%. However, the YOY reading moved from a 2.7% pace in March down to 2.5% in April.
• The U6 rate dropped from 8.9% in March down to 8.6% in April which is the lowest since November 2007.
What’s on the agenda for this week?
Look for a pull-back today due to the fear over the French elections dissipating. There won’t be any real action until Thursday and Friday which could be quite volatile.
The three areas that have the greatest potential to impact back end pricing this week are: (1) Domestic Flavor, (2) The Talking Fed and (3) Across the Pond.
(1) Domestic Flavor: This is another back-loaded week but there are some very heady economic reports that will hit. Of note is Thursday and Friday’s Inflationary data with PPI and CPI. CPI has been over 2% YOY the last couple of readings and this will be watched closely. Retail Sales will be the biggest report of the week and the market is expecting a nice turnaround from March.
(2) The Talking Fed: After last week’s seemingly hawkish FOMC policy and Friday’s jobs data, the bond market will pay close attention to their collective commentary this week:
05/08 James Bullard, Loretta Mester
05/09 Eric Rosengren, Robert Kaplan
05/10 Eric Rosengren
05/11 William Dudley
05/12 Charles Evans, Patrick Harker
(3) Across the Pond: Now that the French election is over, the markets are focusing on if President Macron can get a cabinet together and who will be the Prime Minister. Great Britain will have an important Bank of England meeting. They will be the first Central Bank to be able to make policy without being forced to be on hold pending the French election and the future of Europe.
WTI Oil prices will also need to be closely watched as they have been providing terrific support for MBS pricing. Russia and Saudi Arabia are doing their best to prop up pricing this week.
05/09 3 year note
05/10 10 year note
05/11 30 year bond
As expected, MBS pulled back a little as the fear over the unknown dissipated after the French elections but there was still great support which kept MBS right in the middle of the intra-day trading channel. There were no significant events today to cause any volatility.
Jobs, Jobs, Jobs: The April Labor Market Conditions Index was very strong with a 3.5 reading. March, which was originally released at only 0.4, was revised upward all the way to 3.6 and February was upwardly revised to 3.2. That is three straight months of readings above 3.0. Very solid.
What’s on Deck for Tomorrow: JOLTS, Wholesale Inventories and our 3 year Treasury note auction.
The Talking Fed
St. Louis Fed President James Bullard (non-voting member) did not share the same view put forth in last week’s Fed policy. He said, “I worry we get back into calendar-based policy…and not paying attention to what is happening in the data.” On inflation he said, “The numbers were disappointing. We have been telling a story that we are trending back towards 2% and we went the other way.”
Cleveland Fed President Loretta Mester (non-voting member), and a noted hawk, had a completely opposite view from Bullard’s. She said, “We have met the maximum employment part of our mandate and inflation is nearing our 2% goal,” and cautioned against being over reactionary to recent “weaker” data that is not a trend line yet.