Learn from the Past
Mortgage backed securities (MBS) lost 26 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 Thursday.
It was a holiday-shortened week but it was packed with strong economic data as our national manufacturing and services reports were very strong and Friday’s Jobs data showed wage growth and more new hires than expected. Strong economic data is something that causes mortgage rates to rise.
Overall, wage growth was good and is outpacing inflation which as measured by PCE is under 2% YOY (year-over-year) while wages are gaining 2.5% YOY. When wages outpace inflation it always leads to more inflation. While we are only seeing modest growth in wages, it is consistent and the market is expecting wages to begin to spike in the 4th QTR.
Non Farm Payrolls data, which got all of the headlines, was very strong with a 3 month trend of 194K.
U3 Unemployment Rate ticked up (4.3% to 4.4%) but that is obviously not due to more people not working. It’s due to an uptick in the Participation Rate which basically means that more people are now answering the survey by saying that they don’t have a job AND they are NOW looking for work. Those same people had responded last month that they don’t have a job AND they are NOT looking for work. This is actually a positive piece of data. Overall, this is a solid report and gives our Federal Reserve enough support to continue on their path of moving from rates that are still at emergency low levels (below zero when adjusted for inflation) towards more neutral rates.
The June ISM Services Index hit 57.4 vs estimates of 56.5. The Services sector accounts for more than 2/3 of our economic output. Any reading above 50.0 is expansionary; this is a HOT reading and negative for mortgage rates.
The June national ISM Manufacturing Index was a blockbuster, hitting 57.8 vs estimates of 55.1. Anything above 50 is positive for the economy and a reading above 55.0 is very strong and very rare. This was the highest reading since November 2014.
What’s on the Agenda for this Week?
The three things that have the greatest ability to impact pricing this week are: (1) The Talking Fed, (2) Geo-Political and (3) Domestic Flavor.
(1) The Talking Fed: Fed Chair Janet Yellen will give her semiannual testimony before the Senate on Wednesday and the House on Thursday. Her prepared statement and responses to the seemingly unending wave of inane questions from elected officials could have a big impact on pricing. We also hear from several other Fed officials.
07/10 John Williams
07/11 Lael Brainard and Neel Kashkari
07/12 Janet Yellen and Esther George and the release of the Beige Book
07/13 Janet Yellen and Charles Evans
07/14 Robert Kaplan
(2) Geo-Political: The market is extremely interested in any new developments or progress with the healthcare report in the Senate as well as tax reform, which our Treasury Secretary says will still get done this year. There is also our debt ceiling and plenty of Geo-Political concerns (North Korea, etc.) across the pond that will influence bond trades.
(3) Domestic Flavor: There is a lot of economic data that will hit this week with Retail Sales getting a lot of attention. But it will be the Producer Price and Consumer Price Indexes that will get the most attention.
Treasury Auctions This Week
07/11 3 year note
07/12 10 year note
07/13 30 year bond – most important
As expected, MBS have traded in a very narrow range with no change in back end pricing from Friday’s levels. MBS are effectively on “pause” until Wednesday’s testimony by Janet Yellen.
Jobs, Jobs, Jobs: The fairly new Labor Market Conditions Index hit 1.5 in June vs estimates of 1.8. But May was revised upward significantly from 2.3 to 3.3.
Consumer Credit: Jumped in May to $18.4B vs estimates of 14.3B, plus April was revised upward significantly from $8.2B to $12.9B. When you strip out Auto and Student Loans, Revolving Debt (credit cards) jumped by $7.4B in May, compared to only a $1.2B increase in April.
On Deck for Tomorrow: JOLTS, Wholesale Inventories and a 3 year note Treasury auction.