Learn from the Past
Mortgage backed securities (MBS) gained 45 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower from the prior week. The market saw its lowest rates on Friday and its highest rates on Monday.
It was a very light week for domestic economic data without any major reports that had the gravitas to impact rates. All of the market focus was on central bank action from overseas. But both the Bank of Japan and the European Central Bank left their key interest rates and policies unchanged. The bond market had been anticipating some more “hawkish” forward policy guidance out of the European Central Bank based upon comments made by President Mario Draghi several weeks ago. So, it was considered a “let down” to not get that more “hawkish” tone from the ECB which actually helped rates across the globe as a result.
Domestic Flavor – Housing
Weekly Mortgage Applications improved by 6.3% led by a big rebound in Refinance Applications (+13.0%); Purchase Applications remained steady at +1.0%.
June New Housing Starts hit an annualized rate of 1.215M which outpaced the forecasts calling for 1.155M. Building Permits also surprised to the upside (1.254M vs estimates of 1.200M).
The NAHB Housing Market Index came in at 64 vs 67. This is a slight miss, and a pull-back from last month’s historical highs. Any reading above 50.0 is positive though.
What’s on the Agenda for this Week?
There are a lot of balls in the air this week with OPEC, the FOMC and GDP. Look for MBS to trade in a very narrow range with some small losses today unless OPEC announces some future output cuts, then MBS will sell off a little more. The market is not pricing in a rate hike this week, so if we don’t get one it will not help MBS. But their policy statement on Treasury and MBS purchases will have an impact. Basically, if the time is sooner than the markets expect, MBS will be under pressure. But it if looks like December at the earliest, then MBS will have little to no reaction. The stronger (2.8% and above) GDP is on Friday the worse it is for pricing; weaker (2.25% and below) is very good for MBS.
The three items that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Domestic Flavor and (3) Across the Pond.
(1) The Talking Fed: Tuesday starts two days of Fed meetings that will culminate in a vote and the release of their interest rate decision and policy statement on Wednesday at 2pm EDT. The bond market is not even pricing a 50% chance that the Fed will raise rates again this year even though the Fed has communicated (via dot plot chart forecasts and speeches) that it will raise one more time this year. Regardless, the market does not expect it to do so at this meeting. The main reason (other than no inflation and slow growth) is that this is not one of their meetings where they have a live press conference afterwards with Janet Yellen, and their economic forecasts will not be released at this meeting. So, with little chance of a rate hike, we are focused on learning any more about the timing of the Fed starting to taper (purchase less) of MBS and Treasuries which they have said will start this year. Will they announce a start date at this meeting? That’s what the markets want to know.
(2) Domestic Flavor: There is a lot of housing news this week (Existing Home Sales, Case Shiller, Mortgage Applications and New Home Sales) but it will be Friday’s first release of the 2nd quarter GDP that will carry the most weight for traders. The consensus estimates call for a very strong 2.8% growth rate. Generally, any reading above 2.5% is negative for long bonds but not in this case as the market is not convinced our economy can grow at a reasonable rate unless we get Tax and Regulatory reform.
(3) Across the Pond: Monday’s meeting between all the Oil Ministers will get a lot of attention. While no real action is expected, their recommendations that they issue for the next OPEC meeting will carry a lot of weight. As WTI Oil marches towards $50, it is negative for pricing (higher rates) as it is inflationary. If it moves towards $40 then it is positive for pricing (lower rates) as it is deflationary. There will also be key economic data from the world’s largest economies such as Japan’s Retail Sales, Unemployment Rate and Nikkei Manufacturing and Great Britain’s GDP.
Treasury Auctions This Week
07/25 2 year note
07/26 5 year note
07/27 7 year note