Learn from the Past
Mortgage backed securities (MBS) gained 13 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 Thursday and its highest rates on Tuesday.
At a weekly change of +13 basis points, it was not enough of a move to cause mortgage rates to change. There was some downward pressure (bad for rates) due to WTI Oil making a run at $50 per barrel, strong optimism reports and very strong technical overhead resistance. But there was some very strong upward pressure (lower rates) due to saber rattling between the U.S. and North Korea, very tame domestic inflationary rates and a very solid 30 year Treasury bond auction. These two opposing forces slugged it out all week with the net impact of MBS (and therefore mortgage rates) moving sideways for the week.
Key Domestic Data from Last Week
Inflation: The July Producer Price Index showed a yearly gain of only 1.9% for the Headline number and 1.8% for the Core (ex food and energy). The market was expecting readings of 2.1% for both. So this was a miss to the downside.
The CPI report did not crack the 2.0% mark. However, it was basically in line with expectations. The Headline YOY Core CPI matched market expectations of 1.7% and the CPI YOY moved from 1.6% in June to 1.7% in July but missed the estimates of 1.8%. Bottom line, this report did not change any long bond traders’ view of future inflation.
Small Business Optimism: The July NFIB Index was stronger than expected (105.2 vs estimates of 103.0) and was a nice improvement over June’s reading of 103.6. Among the 10 components in the index, 7 of them saw gains, one was unchanged and 2 were lower. Job openings increased by 5 points and job creation plans rose by 4 points.
Jobs, Jobs, Jobs: The June Job Openings and Labor Turnover Survey (JOLTS) showed a large spike in demand for workers and in unfilled jobs. It came in at 6.163M vs estimates of 5.775M. This shows that in June, the economy was expanding and finding qualified workers was very difficult.
Economic Optimism: The Investor Business Daily August survey was stronger than expected with a 52.2 reading vs a 50.6 estimate.
What’s on the Agenda for this Week?
Overview
MBS are feeling the pressure from strong GDP data out of Japan and a very slight pull-back in expectations of an escalation with North Korea but support is holding (so far) and may limit any large sell-off. Regardless, look for MBS to trade in a tight range of +3 to -15. For the week, it will largely depend on the Three Things listed below. Last week, MBS were priced very high and the only way for MBS to actually move higher than that is either military conflict actually happening with N.K. or expectations that a military strike is imminent. So, barring that, MBS will move off last week’s highs this week but should remain at fantastic levels relative to trend lines over the past 4 weeks.
Three Things
The three areas that bond traders will be paying the most attention to and have the greatest ability to cause backend pricing to change are. (1) Geo-Political, (2) The Talking Fed and (3) Domestic Flavor.
(1) Geo-Political: While the headlines continue to stream this weekend’s news out of Virginia, the bond market will focus on North Korea. MBS prices traded at very elevated levels last week in large part due to a flight to safety over the ever-escalating talk from both sides. IF the rhetoric pulls back, then the flight to safety will pull back.
Also on the radar is this week’s NAFTA meeting between the U.S., Canada and Mexico which starts Wednesday. The bond market is also very much concerned about the debt ceiling which is very quickly approaching this month and will be sensitive to any news on that front.
(2) The Talking Fed: They will issue the Minutes from their last FOMC meeting on Wednesday. Experts will be combing through the comments to see if there is any further direction on timing of tapering their massive amount of purchases of Treasuries and MBS. We also hear from voting members Neel Kashkari and Robert Kaplan this week but we also heard from them last week and don’t expect anything new out of them.
(3) Domestic Flavor: Retail Sales will get the most focus this week. This has been very stubborn as of late as it not showing an increase in sales that correlates in any way with the consistent rise in wages. This is the only piece of economic data that has the gravitas to move the needle on pricing. There will also be some housing news with Weekly Mortgage Applications, Home Builder’s Sentiment, Housing Permits and Building Starts. On the manufacturing side will be regional reports from New York, Philadelphia and Atlanta, as well as Industrial Production and Cap Utilization.
Across the Pond
China (number 2 economy): Their Retail Sales came in at 10.4% vs estimates of 10.8%.
Japan (number 3 economy): Their 2nd quarter GDP was red hot at 4.0% vs estimates of 2.5%
Market Wrap-up
Overview
It was a mild session today as there was no domestic data. MBS were under pressure in early trading on very strong Japanese data but were supported by falling WTI Oil prices. The Fed’s number 3 (Dudley) once again told a non-believing market that the Fed wants to raise rates in December and to expect a taper in September instead of December.
Domestic Flavor
The Talking Fed: New York Fed President William Dudley said today in an interview with the AP today that “the expectations of market participants are unreasonable” in reference to the Fed holding off on tapering and he favored starting the taper soon. He also said that “I would expect — I would be in favor of doing another rate hike later this year.”
On Deck for Tomorrow: Retail Sales, Import and Export Prices, Business Inventories, Home Builders Index, Empire Manufacturing.
Geo-Political
President Trump signed a memo today that will start an investigation into China’s trade policies in relationship to intellectual property practices. This is the first shot at the looming trade war with China but has been expected for two weeks.