Learn from the Past
Mortgage backed securities (MBS) gained just 5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week. However, they did hit a new intra-day high for 2017 which means the lowest rates of the year.
At a weekly change of just +5 basis points, it was not enough of a move to cause mortgage rates to change in a meaningful way and is basically a reflection that now that they are at their highs of 2017, there is very little room for further gains. The week’s economic data was generally strong which is negative for MBS (higher rates) but geopolitical concerns continued to drive up demand for U.S. based bonds which was positive for MBS (lower rates). The two opposing forces “squeezed” MBS to trade in a sideways range.
Below are the Major Economic Releases Last Week
Jobs, Jobs, Jobs
It’s Big Jobs Friday! You can read the official release from the BLS here.
Tale of the Tape:
– August Non-Farm Payrolls (NFP) increased by 156K vs est of 180K
– July NFP was revised lower from 209K to 189K
– June NFP was revised lower from 231K to 210K
– The more important 3 month rolling average is now 185K, it was 195K in July. For all of 2017, we have averaged adding 176K jobs each month. 2016’s pace was 187K per month.
– Average Hourly Earnings on a MOM basis rose 0.1% vs est of 0.2%. It is now at $26.39 per hour.
– On a YOY basis it remained at July’s pace of 2.5%. The market was expecting a small increase to 2.6%.
– The U3 Unemployment Rate increased to 4.4% vs estimates of 4.3%. This is the Headline SEASONALLY adjusted rate. The Non-Seasonally Adjusted rate dropped from 4.6% to 4.5%.
– The U6 Unemployment Rate (Non-Seasonally Adjusted) dropped from 8.9% down to 8.6%.
– The Participation Rate remained at 62.9%.
– We see a rare drop from being stuck at 34.5 hours a week down to 34.4 hours.
How is the bond market viewing this? While the headline NFP looks like a big miss, it will be revised a couple of more times. The Fed and the bond market look at trends and the trend of 185K per month is a good level. It’s still a mystery as to when (and if) wage inflation will appear but it is steadily showing monthly gains. Overall, it’s actually a solid report. It’s not too weak and it’s certainly not too strong. The bottom line here is that the bond market was already not pricing in ANY Fed action until later in 2018 and today’s jobs data will do nothing to change that.
Manufacturing: The national ISM Manufacturing Index for August came in at 58.8 vs estimates of 56.5 which is red-hot. The ISM Prices Paid component remained at a very elevated 62.0.
The August Chicago PMI report hit 58.9 which beat out forecasts of 58.5 and matched July’s pace of 58.9. This is an extremely robust reading considering any reading above 50.0 is good. It’s the second highest reading in 2 years.
Personal Outlays: July’s Personal Income was a little higher than expected (0.4% vs estimates of 0.3%) which is a very large increase from June’s pace of 0.0%. Personal Spending hit 0.3% vs estimates of 0.4% and was only a slight uptick from June’s revised pace of 0.2%. Inflation? Not here. The headline Personal Consumption Expenditures (PCE) on a YOY basis hit 1.4% and so did the Core PCE reading. But both matched the market expectations of 1.4%.
What’s on the agenda for this week?
The week will start off with fantastic pricing and may even set a new intra-day record for the highest MBS prices of 2017. the 103.71 level for the FNMA 3.5 coupon. However, the experts don’t think it’s a sustainable level above that point unless there is direct military action between North Korea and the U.S. Barring that, look for another week of extremely elevated pricing for some very low mortgage rates.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) The Talking Fed and (3) Central Bank-Palooza.
(1) Geo-Political: Both global and domestic events will be the primary driving force in long term bonds this week. On the North Korean front, NK has said that they successfully tested a hydrogen bomb and appear to be ready to launch another test missile by Saturday. Meanwhile, the U.S. has approved the sale of up to $8B of weaponry to South Korea.
Domestically, Congress is back to work today after their summer recess. On their plate is the debt ceiling (and possible government shutdown) and pushing through Tax reform as well as approving a huge spending bill for Harvey recovery efforts (with an even bigger hurricane on its way to Florida).
(2) The Talking Fed: They will release their Beige Book on Wednesday which is prepared by the 12 Federal Reserve districts to be reviewed by the FOMC in their policy deliberations.
09/05 – Lael Brainaird, Neel Kaashkari and Robert Kaplan
09/06 – Fed’s Beige Book
09/07 – Loretta Mester, Raphael Bostic, William Dudley and Esther George
09/08 – Patric Harker
(3) Central Bank-Palooza: We will hear from several major Central Banks this week and experts will be paying close attention to their interest rate decisions, policy statements, asset purchase programs and forward guidance.
09/05 – Royal Bank of Australia’s Interest Rate and Policy Statement
09/06 – Bank of Canada’s Interest Rate and Policy Statement
09/07 – European Central Bank’s Interest Rate and Policy Statement (focus on QE), Sweden’s Central Bank Interest Rate and Policy Statement.
There is really only one economic release that has the gravitas to move the needle on pricing and that is Wednesday’s ISM Services Index which represents 2/3 of our economic output.