Learn from the Past
Mortgage backed securities (MBS) lost 57 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher from the prior week. The market saw its lowest rates on Monday and its highest rates on Tuesday.
It was an interesting week that was driven primarily by long bond traders shifting their bias and their hedges after a multi-day barrage of key central bank figures (Bank of England, European Central Bank, Bank of Japan, Bank of Canada, etc.) talking up relaxing global stimulus measures. This concerted and well-coordinated unified message is designed to get the bond markets to start to adjust. There was also stronger than expected economic data as the 1st quarter GDP data was revised upward and there was a blockbuster Chicago PMI report. All of which combined to send mortgage rates to their highest levels since May 15th.
Domestic Reports Results
Personal Income and Outlays: The nation’s savings rate moved up to an eight-month high in May. Personal Income increased by 0.4% (vs estimates of 0.3%) while Personal Spending grew by only 0.1%. PCE (Personal Consumption Expenditures) were basically in line with estimates. The Core PCE YOY hit 1.4% vs estimates of 1.4% and the headline PCE YOY hit 1.4% vs estimates of 1.5%. Both are far away from the Fed’s 2.00% target rate but were what the market expected.
Manufacturing: June Chicago PMI 65.7 vs estimates of 58.0. Any reading above 50.0 is expansionary, and any reading above 55.0 is very strong…a reading above 60? Red HOT!!! This is first reading above 60 since 2014.
Gross Domestic Product: Our nation’s report card saw an upward revision to our grades. It went from a C to a C+. There have already been several releases and revisions to this data set. Today’s revision moves our 1st quarter GDP from 1.2% to 1.4% which was much better than expected. Consumer spending saw a nice upgrade from 0.6% to 1.1%.
Consumer Confidence: The June reading is at a very high level and stronger than market expectations (118.9 vs estimates of 116.7) and nice improvement over May’s 117.6 level. Consumers’ assessment of the labor market improved. Those stating jobs are “plentiful” rose from 30.0% to 32.8%, while those claiming jobs are “hard to get” decreased slightly from 18.3% to 18.0%.
What’s on the Agenda for this Week?
The bond market closed at 2PM Eastern today and will not reopen until Wednesday. Even though it is a holiday-shortened week with limited volumes until Wednesday, it is a very pivotal week. The 100-day moving average is just below current trading levels which should act as a nice backstop.
The three items have the greatest ability to impact back-end pricing this week are: (1) Domestic Flavor, (2) Geopolitical and (3) The Talking Fed.
(1) Domestic Flavor: Jobs, Jobs, Jobs. This week is Big Jobs Friday with Non-Farm Payrolls and the Unemployment Rate. But more importantly, there will be the Average Hourly Wages data which has the greatest impact on MBS pricing. But through the week there will also be ADP Private Payrolls, Challenger Job Cuts and Weekly Jobless Claims to round out a ton of jobs related data this week. Besides the Jobs data, the two biggest releases this week are ISM Manufacturing and ISM Services.
(2) Geopolitical: There is an important meeting of the G20 starting on Friday but there are plenty of “pre-G20” meetings going on. The markets will pay close attention to issues regarding North Korea, Russia and the Middle East. Brexit negotiations also will continue to get a lot of attention as well as speeches by key central bank figures across the pond.
(3) The Talking Fed: The minutes will be issued from their last FOMC meeting where they raised rates and gave guidance on at least one more rate hike this year as well as decreasing the pace of Treasuries and MBS purchases. There will be some more detailed background information from that meeting and it can have a big impact on pricing this week. We also hear from James Bullard, John Williams and Jerome Powell this week.