Learn from the Past
Overview
Mortgage backed securities (MBS) lost 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
Very strong economic data continues with Jobs (ADP Private Payrolls and BLS Non-Farm Payrolls) as well as a very upbeat economic review by the 12 districts of the Federal Reserve. Both of those are providing pressure on mortgage rates. But the resignation of Gary Cohn and the uncertainty of tariffs and a potential trade war is providing support for rates.
Jobs, Jobs, Jobs
It was Big Jobs Friday! You can read the official BLS report here.
Here is the Tale of the Tape:
Jobs – Non Farm Payrolls:
February 313K vs estimates of 200K.
January was revised upward from 200K to 239K.
December was revised upward from 160K to 175K.
The more closely watched rolling 3 month moving average increased to 242K which is very robust.
Wages:
Monthly Average Hourly Earnings increased by 0.1% over the prior month. Market was expecting 0.2%.
YOY Average Hourly Earnings increased by 2.6% form this time last year. Market was expecting 2.8%.
The national average hourly rate for private non-farm workers increased to $26.75.
Hours Worked picked up by 0.1% to 34.5 which was higher than expectations of 34.4
Unemployment Rate:
The February Unemployment Rate hit 4.1% which is the same rate as January. The market was expecting a small improvement to 4.0%.
The Participation Rate had a very rare increase and hit 63.0% vs estimates of 62.5%.
The February ADP Private Payrolls came in hotter than expected (235K vs estimates of 195K), plus January was revised higher from 234K up to 244K (10K).
Productivity:
The revised 4th QTR data was revised a little higher. Non-Farm Productivity was revised from -0.1% up to 0.0% and Unit Labor Costs were revised higher from 2.0% to 2.5%.
Geo-Political
President Trump’s Senior Economic Advisor Gary Cohn resigned presumably over his objection to the proposed tariffs.
The Talking Fed
The Fed’s Beige Book was issued on Wednesday. This is prepared specifically to be used in the decision making process during the March Fed policy meeting. It is a compilation of all 12 Fed districts on their views of how each of their fiefdoms are doing economically. Overall, the picture is stable growth and concern over impending wage inflation. You can read the official release here.
What’s on the Agenda for this Week?
Overview
Domestically, really only Tuesday’s CPI data has the gravitas to move pricing in a meaningful way and then only IF it is a huge miss or beat. The Bank of Japan (BofJ) Minutes and European Central Bank head Mario Draghi’s speech will be very closely watched by bonds. Tuesday’s 30 year Treasury bond auction is the most important auction of the week to watch.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Geo-Political, (2) Inflation Nation, (3) Across the Pond
(1) Geo-Political: On one side, there are easing tensions between the U.S. and North Korea. While this is important for many reasons, on the MBS side there has been a solid “fear factor put” in long bonds which has been supportive of pricing. So, IF (and that is a big IF) the bond market buys into the headlines that there will be a peace accord, MBS could lose some of that premium. On the tariff side, Japan and the EU have officially requested that they be exempted from the new tariffs.
(2) Inflation Nation: There will be both Consumer Prices and Producer Prices this week. Tuesday’s CPI will carry the most weight. While the Headline YOY CPI has been over 2%, the market will be watching for when the Core (ex-food and energy) will crack the 2% level; it has been stuck at 1.8%.
(3) Across the Pond: A lot going on this week: China: Continued “trade war” discussions and Retail Sales data. Japan: BofJ Minutes, Industrial Production. Eurozone: Finance Ministers Meeting, Unemployment Change, CPI, and we hear from ECB head Draghi.
Treasury Dump
Quick – dump our debt while we can still finance it at low rates. That is exactly what the Treasury is trying to do with rates steadily rising.
03/12 3 year note and 10 year note
03/13 30 year bond
Market Wrap-up
Overview
A very boring open to the week. As usual, MBS had zero reaction to the 10-year note auction. There were no major economic releases today. The bond market is moving sideways ahead of tomorrow’s CPI report.
Domestic Flavor
Treasury-Palooza: There were four note auctions today – 3 month, 6 month, 3 year and 10 year.
- 3-year Note: $28B went off at a high yield of 2.436%. It was the highest on a 3 year term since 2007. Demand was solid but waning compared to the last auction with a bid-to-cover ratio of 2.94 vs last of 3.00.
- 10-year Note: $21B went off at a high yield of 2.889%. It was the highest on a 10 year term since 2010. Demand was very solid compared to the last auction with a bid-to-cover ratio of 2.50 vs last of 2.34.
Treasury Budget: There was a huge jump in the interest on the public debt, which in the month of February jumped to $28.434 billion, up 10.6% from last February and the most for any February on record. In the first five months of this fiscal year, that interest is $203.234B, up 8.0% YOY and the most on record for any October-February period. The sharp increase comes as the US public debt rapidly approaches $21 trillion. And with the effective interest rate now rising with every passing month, it is virtually assured that this number will keep rising for the months ahead.
On Deck For Tomorrow: CPI, 30-year Treasury bond auction.