What happened last week?
Mortgage backed securities (MBS) lost just 4 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 Thursday.
It was the fourth straight week where the end result was a very narrow change, but there was some volatility during the week as there was a net difference of -67 BPS from the intra-day highs of the week and the intra-day lows of the week.
The two biggest movements were Wednesday and Friday. Wednesday sold off (higher rates) due to comments from a Fed official and Friday rallied (better rates) due to weaker inflationary data.
The Talking Fed
Boston Fed President Eric Rosengren said the Fed needs to hike at least three more times this year, not the two times that the market is expecting. He said, “Along with a gradual reduction in the level of the balance sheet, it would still be reasonable to have three rate increases over the remainder of this year.” This was much more “hawkish” than what the markets have priced in which is basically only one more hike this year and not seeing an adjustment to the pace of MBS purchases until 2018.
Inflation? The front-end Producer Price Index (PPI) showed some inflationary pressure, but it is clear for now that it is being absorbed by companies and not being passed on to consumers as PPI showed a little weakness. Of note is the fact that Core CPI YOY dropped back below the 2.00% target inflation rate which is why MBS rallied on Friday.
The April PPI was much higher than expected. The Headline MOM reading was more than double market expectations (0.5% vs estimates of 0.2%) and is now at 2.5% on a YOY basis which is much higher than the consensus estimates of 2.2%. When you look at the Core (ex food and energy) the MOM reading came in at 0.4% vs estimates of 0.2% and YOY it was 1.9% vs estimates of 1.7%. The YOY reading is the highest since January 2015!
The April Consumer Price Index (CPI) did not show the gains from Thursday’s PPI, which means that companies for the time being are not passing through the increased costs to consumers. The Headline CPI MOM reading matched expectations (0.2% vs estimates of 0.2%) but the Core (Ex food and energy) MOM reading was a little light (0.1% vs estimates of 0.2%). But the Fed looks at the YOY data and the Core CPI YOY fell back below 2.0% (1.9% vs estimates of 2.0%).
What’s on the agenda for this week?
It is a very light domestic economic schedule this week that lacks any big name releases that have the gravitas to impact pricing. For the past four weeks, the weekly change has been -25, -2, -13, -4 respectively… so the 4 week trend for week-over-week pricing has not supported a floating bias. The good news though is that geo political fear has kept any U.S. at elevated levels and even though there have not been pricing gains as a trend line, the levels have been steady. This week is likely to be more of the same. WTI Oil needs to be closely watched to see if the upper movement this morning is real or just a blip on the chart. Look for MBS to be in the same relative range that they have have been unless something from overseas implodes.
The three items that have the greatest ability to impact pricing this week are: (1) Geo-Political, (2) Black Gold and (3) Across the Pond.
(1) Geo-Political events will continue to be one of the major driving forces of pricing. Fear over China, North Korea and the fate of the Eurozone has kept MBS at very elevated levels. The odds that the rug will be pulled out from under MBS due to a retreat in fear is very low. North Korea just had another missile launch and claim they can handle a nuclear payload. Meanwhile in Europe, the newly-elected French President Macron has appointed a new prime minister and Germany’s Merkel has won an important state election on her way to the national election in September. Both will reduce the Eurozone fear a smidge. Any movement in taxes or healthcare in the U.S. also could play a role.
(2) Texas Tea, Black Gold: WTI Oil prices can have a large impact on MBS pricing. As they fall, there is much less threat of inflation and bonds love that. As they move higher, the threat of inflation increases and bonds hate that. Right now, Both Saudi Arabia and Russia are pushing to extend OPECs “freeze” in production which has stabilized WTI Oil from a free fall two weeks ago. If prices crack back above $50, then MBS could feel a little pressure.
(3) Across The Pond: While there are no major U.S. economic releases this week that can impact pricing, there is plenty to digest from overseas:
- Great Britain: Retail Sales, PPI, CPI, Unemployment Rate
- Eurozone: GDP, CPI, Consumer Confidence
- Germany: Economic Sentiment, PPI
- Japan: Industrial Production, GDP
It was a nice and calm opening to the week, with rising oil prices pressuring MBS vs. continued geo-political fear propping up MBS. The end result has been sideways movement…no upside to floating.
Housing: The May NAHB Index jumped from 68 in April to 70. This is the second best reading since 2005, and the internal reading of expected future sales rose to its best level since 2005. Any reading above 50.0 is considered positive, so this is a very strong reading.
Manufacturing: The regional NY Empire Manufacturing Index dropped to a dismal -1 which was well short of market expectations of 7.0.
Treasury International Capital (TIC): The Net Term TIC shows that $59.8B flowed into the U.S. from across the pond. This is lighter than market expectations of $68.3B but was an increase over the previous reading of $53.1B. Still, this is older data from March.
Texas Tea, Black Gold: Made some gains today as WTI Crude increased by 2.19% to $48.89 on news that both Saudi Arabia and Russia which to continue the production level freezes for another quarter.
On Deck for Tomorrow: Housing Starts and Building Permits, Industrial Production and Capacity Utilization.