Learn from the Past
Mortgage backed securities (MBS) gained 22 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 Thursday and its highest rates on Monday.
The bond market saw some large swings Thursday and Friday. On Thursday, MBS had some solid gains (lower rates) due to geopolitical concerns after a report that Special Counsel Mueller is impaneling a grand jury in the “from Russia with love” investigation. This unexpected event caused a “flight to safety” in bonds. However, Friday’s strong Jobs data erased those gains and MBS sold off (higher rates) for the session.
Key Domestic Data from Last Week
Jobs, Jobs, Jobs – Big Jobs Friday!
Here is the Tale of the Tape:
Non-Farm Payrolls (NFP):
July NFP 209K vs estimates of 180K
June NFP revised upward from 222K to 231K
May NFP revised lower from 152K to 145K
Three month rolling average is 195K
Average Hourly Wages increased by 0.3% on MOM basis which matched expectations. That is a 9 cent gain to $26.36 per hour. YOY, the gain is 2.5% (or 65 cents) which is higher than market forecasts of 2.4%. Week-over-Week, Wages gained 2.8% which shows some upward momentum.
Unemployment Rate: The headline U3 dropped to 4.3% which matched market expectations and is the lowest reading since 2001 which makes it a 16 year low. The U6 Unemployment Rate remained at 8.6%. The Participation Rate picked up from 62.8% to 62.9%.
Services: The July ISM Non-Manufacturing report (2/3 of our economy) showed a nice expansionary pace of 53.9. Any reading above 50.0 is positive. However, the markets were expecting a much stronger pace of growth in the 57.0 range, so this is a disappointment.
Manufacturing: The July national ISM Manufacturing PMI hit 56.3 which is at a very high level considering that any reading above 50.0 is expansionary. It is basically what the market expected (56.5). But what was not expected is that the ISM Prices Paid component jumped to 62.0 vs estimates of 55.5.
Factory Orders were higher than expected in June (3.0% vs estimates of 2.9%) and May was revised upward significantly from -0.8% to -0.3%. MBS gained 23 BPS from Wednesday’s close which caused back-end pricing to improve for the session.
What’s on the Agenda for this Week?
On an intra-day basis, look for a narrow range of +3 to -12 BPS. Tomorrow’s OPEC meeting is the first event to impact pricing and unless they agree to increase production, it won’t help pricing (hint: they are talking about decreasing production). The real question is: What is there that can cause MBS to rally for better pricing? Answer: not much. It will take a perfect storm of negative geopolitical news, low global inflation and the talking Feds spreading a message that they have completely changed their minds and no longer want to taper. So, no rally this week. However, look for MBS to still trade in a nice range with only limited downside. So that means holding out (floating) for better pricing is not justified when looking at the overall risk. However, a big sell-off is not likely meaning rates will continue to be attractive.
The three items that have the greatest ability to impact back end pricing this week are: (1) The Talking Fed, (2) Inflation and (3) Across the Pond.
(1) The Talking Fed: We will hear from several key voting members this week. Experts will be paying close attention to the overall theme of the timing of starting their MBS taper this year.
08/07 James Bullard and Neel Kashkari
08/09 Charles Evans
08/10 William Dudley
08/11 Robert Kaplan
(2) Inflation Station: There are both PPI and CPI this week. The market is expecting PPI YOY to get back above 2.0%. However, that is not expected to flow through to Friday’s CPI which is expected to hit 1.8%. The closer Friday’s CPI data is to 2.0%, the worse it is for MBS pricing. The closer that reading is to 1.5%, the better it is for pricing.
(3) Across the Pond: There will be some important economic data out of the world’s second largest economy China releases their Import and Export data as well as their PPI and CPI. There will also be key data from Japan (number 3 economy), Germany (number 4) and Great Britain (number 5).
Treasury Auctions This Week
The 10 and 30 are not new auctions but reactions of current debt.
08/08 3 year note
08/09 10 year note
08/10 30 year bond (most important)
The bond market will also be paying close attention to Tuesday’s OPEC meeting as well as other geopolitical events. The United Nations voted 15-0 on Saturday to impose new and harsher sanctions on North Korea which will cripple its exports (and therefore the cash flow into the nation that would be presumably used for nuclear research). This has put concerns over a trade war between China and the U.S. at ease for the time being.
MBS have moved in a very narrow range and made a very small movement upward after a weaker than expected Consumer Credit report.
Jobs, Jobs, Jobs: The fairly new Labor Market Conditions Index created by the Federal Reserve has been discontinued. They announced that effective today they are killing it because it had no real value and was awful at proving any type of predictive labor market conditions.
Consumer Credit: The June headline reading was much weaker than expected ($12.4B vs estimates of $16.0B). When you strip out autos and student loans, the core credit card balance increases were actually pretty strong with $4.1B.
On Deck for Tomorrow: Small Business Optimism Index, OPEC, JOLTS and a 3-year note auction.
The Talking Fed
St. Louis Fed President James Bullard (non voting member) said, “The current level of the policy rate is likely to remain appropriate over the near term.”
Minneapolis Fed President Neel Kashkari (voting member) didn’t offer any real Fed guidance but did harp on his mantra that reducing any level of immigration would be negative for the economy.