LEARN FROM THE PAST
Overview
Mortgage backed securities (MBS) gained just 16 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 Tuesday and its highest rates on Monday.
It was a very light week for economic data, none of which had the gravitas to impact mortgage rates. But there were several housing-related economic releases.
Housing
Weekly Mortgage Applications: Were flat with a change of 0.6% from the prior reading. Purchase Applications dropped 1.0% and Refinance Applications gained 2.0%.
Existing Home Sales: Were better than expected, rising 1.1% for 5.62M units vs estimates of 5.55M units
FHA Price Index: The April FHFA Home Price Index jumped by 0.7% which was almost double the market forecasts of 0.4%. March was revised upward from 0.6% to 0.7%.
New Home Sales: The May New Home Sales report showed some solid growth. It came in at 610K vs estimates of 590K. Plus April was revised upward from 569K to 593K which is a sizable revision. The median sales price jumped 11.5% to $345,800. Supply is still very tight with only 5.3 months of inventory at the current sales pace which means steady upward pressure on future prices.
What’s on the agenda for this week?
Overview
This is a very pivotal week. MBS have been trading in a very well defined channel for the past two weeks. There actually is an opportunity to break out of that channel for worse pricing this week. That momentum lower can only come from the passage of the health care reform in the Senate. IF it is not passed, then MBS will stay in the current channel.
Three Things
The three areas that have the greatest ability to impact back-end pricing this week are: (1) Geo-Political, (2) The Talking Fed and (3) Domestic Flavor.
(1) Geo-Political: Across the Pond, Theresa May will be teaming up with Northern Ireland to have the support she needs to stay in power and continue with Brexit negotiations which began last week. President Trump is meeting with the leader of India today to discuss trade, but the market focus is on the Senate as they attempt to vote on health care reform this week.
(2) The Talking Fed: There is no question that the Fed’s last statement was hawkish and points to another hike this year as well as fewer MBS purchases. But the bond market simply hasn’t come around to buying into that as a real possibility yet, particularly given the recent bout of economic data. So, experts will continue to pay very close attention to their speeches to see if they begin to shift market sentiment:
06/26 John Williams
06/27 John Williams, Patrick Harker, Janet Yellen and Neel Kashkari
06/29 James Bullard
(3) Domestic Flavor: This is a big week for economic data with some big name reports that have the ability to move the needle on pricing. The most important one is Friday’s PCE report which is what the Fed uses as their official inflation gauge. There will also be Durable Goods, Chicago PMI, Consumer Confidence and the final revision to the 1st quarter GDP.
Treasury Auctions
06/26 2 year note
06/27 5 year note
06/28 7 year note
Market Wrap-up
Overview
MBS have traded right in the range that was expected. John Williams’s comments were negative for pricing while Durable Goods were positive for pricing.
Domestic Flavor
Durable Goods Orders: The May reading was much weaker than forecasts. The Headline number (which includes the volatile airline industry) dropped -1.1% which was well below estimates of -0.4%. The core ex-transportation reading also fell short (0.1% vs estimates of 0.5%). It was a mixed bag with airline orders falling -12% but vehicles rose 1.2% and machinery orders grew at a 0.6% pace.
Treasury Auction: This was the start of three straight days of shorter term note auctions. $26B of 2 year Treasury notes went off at a high yield of 1.348% which is the highest interest rate since 2008. Demand was very strong though with a bid-to-cover ratio of 3.03 which is the highest this year.
On Deck for Tomorrow: Janet Yellen, Consumer Confidence, Richmond Fed, 5-year Treasury auction and Case-Shiller.
The Talking Fed
San Francisco Fed President John Williams (non-voting member) voiced his support for another rate hike this year and not wanting to fall behind the curve. He said, “Gradually raising interest rates to bring monetary policy back to normal helps us keep the economy growing at a rate that can be sustained for a longer time,” and “If we delay too long, the economy will eventually overheat, causing inflation or some other problem.”