Learn from the Past
Mortgage backed securities (MBS) gained 2 basis points 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 just +2 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 a very strong Retail Sales report but some terrific upward support due to geo-political concerns across the globe.
Key Domestic Data from Last Week
Retail Sales were much stronger than expected. The headline July reading hit 0.6% vs estimates of 0.4%. Plus June was revised upward significantly from -0.2% all the way up to +0.3%. When you strip out Autos, Retail Sales increased by 0.5% vs estimates of 0.3% and June was revised upward from -0.2% to +0.1%
The Talking Fed
The bond market focused on anything related to the timing of their taper. The Minutes said “Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets. Many noted that the program was expected to contribute only modestly to the reduction in policy accommodation.” As well as “Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.”
Those statements combined make it clear that they are sending the message that they will announce the start of the taper in September. However, once again, the markets have not completely bought into their forward guidance.
Separately, we heard from two Fed Presidents. Dallas Fed President Robert Kaplan said, “We have to be careful in our further moves” and the Federal Reserve should be “very patient and judicious” as it considers whether to raise interest rates. The White House says they will stay in their current position.
Minneapolis Fed President Neel Kashkari said that the Fed is watching the debt ceiling and how it will be handled in Congress before making a final decision on the timing of adjusting their balance sheet.
What‘s on the agenda for this week?
This is a very pivotal week. Look for MBS to trade relatively sideways until Thursday as there a no scheduled events that can impact pricing until then. MBS will continue to trade at very elevated levels but any real gains cannot happen unless there is a new injection of fear into the market place. Friday’s speeches by Yellen and Draghi are key and will drive pricing for the next couple of weeks. If Draghi spells out rate hikes and tapering, then MBS will sell off. If he delivers a big “nothing burger” then MBS will stay in the same range.
The three things that can have the most influence on back end pricing this week are: (1) Jackson Hole, (2) Across the Pond and (3) Geo-Political.
(1) Jackson Hole: Starting Thursday, the Kansas City Fed will host its annual Economic Policy Symposium in Wyoming. Really, this will drive markets for the next couple of weeks. A ton of Fed and foreign central bankers will speak, including Yellen and Draghi (ECB) on Friday. The bond market is going to be very reactionary to any comments by either regarding tapering and rates.
(2) Across the Pond: There will be a heavy dose of Market Manufacturing PMI from most of the big 10 economies this week as well as final GDP data out of Germany and revised GDP out of Great Britain. There will also be inflation readings out of Japan.
(3) Geo-Political: The markets are very much interested in who our next Fed Chair will be and are starting to hedge that Gary Cohn will get the nomination, but of course that is all speculation at this point. However, if he does eventually get the nod, you can expect MBS to sell off as he has said that he wants to reduce the amount that banks are forced to hold in reserves to pass their stress tests and is in favor of reducing the Fed’s balance sheet. The bond market will continue to focus on the looming debt ceiling and the ability of the Republicans to work together to get tax reform and a budget done.
As expected, today was a real “yawner.” Yes, the eclipse was super cool but there were no events that could cause a spike in fear buying which is the only way MBS can see any type of improvement in pricing.
There were no domestic releases.
Treasury Secretary Steven Mnuchin and Kentucky Senator Mitch McConnell jointly spoke in Louisville, KY today. Mnuchin said he just completed a visit to Fort Knox to verify that the gold reserves reported are actually there. (He is only the third Treasury secretary to actually do that!) He also said that he expects tax reform to get done soon.
For Sen. Mitch McConnell’s part, he said that there is “no way” the U.S. would default on its debt and that they would get the debt ceiling raised.