Learn from the Past
Mortgage backed securities (MBS) gained 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. At a weekly change of just +7 basis points, it was not enough of a move to cause mortgage rates to change. There were no major domestic economic releases that had any impact on rates and pricing last week. The bond market focus was squarely on world central bankers and economists meeting together in Jackson Hole, Wyoming.
Jackson Hole, WY Economic Symposium
Dallas Fed President Robert Kaplan (voting member): The key takeaway from his speech is that in his opinion the current “neutral” Fed fund rate is “around” 2.5%. Currently the Fed Fund rate is 1.25%. So, in order for the Fed to move from its accommodative stance, they will need to gradually raise rates by another 1.25%…and the Fed WANTS to get back to a “neutral” bias. Also, he said that he did not expect the impending reduction in their balance sheet to impact markets “materially.”
Kansas City Fed President Esther George (non voting member) said that the Fed’s mandate is “price stability” and not really inflation. She said that there is certainly price stability as well as steady growth and that is supportive of another rate hike this year.
Fed Chair Janet Yellen spoke on Friday. Basically, she did not address monetary policy and focused on financial stability.
You can read the official transcript of her speech here.
European Central Bank President Mario Draghi also sidestepped and did not really address future monetary policy or QE. Instead he warned against “protectionism” as something that could hinder global growth. And that global growth was needed to continue to bring the Eurozone forward in its slow recovery.
What‘s on the Agenda for this Week?
This is a holiday-shortened week (bond market closes early on Friday and does not reopen until Tuesday). Look for MBS to continue to trade at very elevated levels (pricing very similar to the past two weeks). A major move upward in pricing is not really in the cards….there is really no real upside to any risk in expectations of a legitimate rally upward. Small gains (+9 to +15) are very realistic but do not warrant any risk taking to get there. It will take a very weak Average Hourly Wages report on Friday for MBS to make any type of run upward. If jobs data on Friday is stronger than expected AND higher PCE, the max downside is in the -9 to -21 range for the week.
The Three Things that have the greatest ability to impact back-end pricing this week are: (1) Jobs, Jobs, Jobs, (2) Domestic Issues and (3) Across the Pond.
(1) Jobs, Jobs, Jobs: There is actually a very robust domestic economic calendar which will see revisions to the 2nd quarter GDP and some important manufacturing data with Chicago PMI and ISM. But the bond market will focus on Big Jobs Friday as it is the last jobs report before September’s Fed Meeting. While the rolling three month trend line for Non-Farm Payrolls is not likely to change, and neither is the 4.3% Unemployment Rate, the bond market will pay very close attention to Average Hourly Wages. Specifically the YOY reading which was at 2.5% and is anticipated to rise to 2.6% or 2.7%. The higher that number is, the worse it is for rates.
(2) Domestic Issues: Harvey is devastating much of Texas, and Texas is one of the main driving engines in our national economic output. In the short term, the massive disruption will be a hit to GDP which is good for rates, but it also will cause a spike in refined gas prices which is negative for rates. Additionally, in the near term, it will cause a large spike in construction and rebuilding which will be a larger gain to GDP in the 4th quarter. President Trump is also in the spotlight as he tries to push forward with Tax Reform.
(3) Across the Pond: There is a lot of important data coming out of the worlds’ largest economies this week and since expectations of foreign growth/inflation is a major factor in bond prices, experts will be paying close attention:
China (number 2 economy) – PMI manufacturing and services
Japan (number 3 economy) – Unemployment Rate, Retail Sales, Industrial Production, Nikkei Manufacturing PMI and Consumer Confidence
Treasury Auctions this Week
08/27 2-Year and 5-Year note auctions
08/28 7-Year note
MBS have moved in a very narrow range with no significant economic data today. They have been testing the upper resistance level which has put a firm cap on any gains.
International Trade in Goods was a little lighter than expected with the preliminary reading of $-65.1B vs estimates of $-64.1B as our trade gap widened by $1B.
On Deck for Tomorrow: Case-Shiller HPI, Consumer Confidence and 7-year note.
2-year note: $26B went off at a high yield of 1.345% compared with last month’s 1.395%. Demand was very soft with a bid-to-cover ratio of 2.86 vs last month’s very strong 3.06.
5-year note: $34B went off at a high yield of 1.742% which a little better than last month’s 1.884%. Demand remained unchanged at 2.58.