What happened last week?
Mortgage backed securities (MBS) moved sideways for the week. As expected…another very narrow range, which means for the entire week, the net impact was zippo. There simply was nothing that shocked the system last week which is about the only thing that could move MBS higher.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were lighter than expectations (234K vs estimates of 238K). The more closely watched 4 week moving average fell to a jaw-dropping 235,250K. Continuing Claims were just a tad better than expectations (1.923M vs estimates of 1.925M)
International Trade: Trade in goods (not services) basically was in line with estimates (-$67.6B vs estimates of -$64.7B.
Texas Tea, Black Gold: A mixed bag as OPEC said that they will extend their current “cuts” for 9 more months but will not increase the level of the production cuts.
Treasury Auction: The 7 year note auction Friday was good but not as strong as Wednesday’s 5 year auction. $28 Billion went off at a high yield of 2.060% which is a slight decrease from April’s rate of 2.084%…so in that sense, it was a very good auction. But demand pulled back as the bid-to-cover ratio was 2.54 which was much weaker than April’s 2.73
Across the Pond
Great Britain (number 5 economy): Their first quarter GDP YOY was revised from 2.1% down to 2.0%.
Spain (number 14 economy): Their first quarter GDP YOY matched expectations with a 3.0% growth rate. The Catalonia region continues to scream for independence and traders are watching that development very closely. Catalonia is seeking a referendum vote in the Fall but Spain appears to be wanting to block that vote.
What‘s on the agenda for today?
Opposing forces have MBS trapped. This morning’s economic data is negative for pricing but there is offsetting support due to WTI Oil back below $50, geopolitical concern and a long holiday weekend which effectively started at noon EDT today for most bond traders. Look for MBS to once again be squeezed in a very narrow range until the market reopens on Tuesday.
GDP: The first quarter GDP reading was originally released at 0.7%. In its first revision (will be revised again) it was moved up to 1.2% which was much stronger than market expectations of 0.8%. This explains why the Fed was so dismissive of the original 0.7% print. Consumer Spending was revised upward double the original release to 0.6%.
Durable Goods Orders: The April headline reading was much stronger than expected (-0.7% vs estimates of -1.4%). But this is a very volatile report as evidenced by March’s revision from 0.7% all the way up to 2.3% which is a huge revision. Ex Transport, it was -0.4% vs estimates of +0.4%, but again the prior period was revised upward from -0.2% all the way up to +0.8%.
Consumer Sentiment: The May reading was revised from 97.7 to 97.1; the market was expecting 97.5
The Talking Fed
St. Louis Fed President James said that he sees minimal impact on long-term bond yields from reductions in the Fed’s balance sheet, which he hopes will start in the second half of this year. He also said it was good to cap the amount of MBS allowed to run off the Fed’s balance sheet, but he was indifferent to what the size of the cap should be.
Across the Pond
G7: The market is looking for any movement in global warming, trade and NATO.