Learn from the Past
Overview
Mortgage backed securities (MBS) gained 22 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move basically move sideways for the week; in some cases there may have been a very slight improvement.
It was a holiday-shortened week with the bond market closing early on Thursday and closed for Good Friday. MBS reached their best levels of the week on Thursday as traders rushed to park their money into the safety of bonds over the long holiday weekend, which caused a temporary increase in demand. For the week, there were actually some very strong economic reports (GDP 2.9%, very high Consumer Confidence and Consumer Sentiment readings and an uptick in the Fed’s key inflationary reading) but this was offset by uncertainty and concern over a looming trade war with China as well other key trading partners.
Domestic Flavor
Inflation Nation: The Fed’s key measure of inflation inched up as the Headline PCE YOY reading hit 1.8% vs. estimates of 1.7%. The Core YOY number inched up from 1.5% to 1.6% which was expected. Both readings are still below their target rate of 2.00% but starting to trend upward. Personal Income saw another monthly gain, this time 0.4% which was expected. Personal Spending gained 0.2% vs. estimates of 0.2%.
Manufacturing: The bellwether Chicago PMI was much lower than expected (57.4 vs. estimates of 62.0) and is one of the lowest readings in the last 12 months. However, ANY reading above 50.0 is expansionary and reading in the upper 50’s is very, very strong.
Consumer Sentiment: The University of Michigan’s Survey was revised from the mid-month prelim reading of 102.00 to the final monthly reading of 101.4 which is the highest level since 2004.
Consumer Confidence: The March reading continues a trend of very high levels. It was just off its record setting pace in February (127.7 vs. 103.8)
Taking it to the House: The February Pending Home Sales report was much stronger than expected with a MOM gain of 3.1% vs. estimates of 2.1%. Weekly Mortgage Applications improved by 4.8% led by a big 7.8% jump in Refinance Applications. Purchase applications continued their solid trend with a 3.0% improvement.
Gross Domestic Product: We got our 3rd look at the 4th quarter GDP and its second and final revision. It was revised upward to 2.9% from 2.5%. The market was expecting something in the 2.6% to 2.7% range, so this was stronger than expected. PCE QoQ remained at 1.9%.
What’s on the Agenda for this Week?
Overview
Look for MBS to pull back today as traders return to full force for first time since Wednesday and begin to start to pull their money out of the safe-haven of bonds and put it back to work. This is barring any big miss or beat in wage data on Friday, or any real change in policy (so far all the U.S./China/NAFTA trade jabs are not real policy changes by any party). Overall, look for pressure on MBS if they are near the 50 day moving average but once again, the support level for the past 6 weeks should prove to be very stable as a bottom.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are. (1) Trade Wars, (2) Jobs, Jobs, Jobs and (3) The Talking Fed
(1) Trade Wars: The looming “threat” of an escalating trade war has provided a bottom for MBS for the past 6 weeks. While a rebalancing of trade practices is certainly required, it can bring with it volatility and uncertainty at the least and at the worst, slow down our economy. The world’s second largest economy, China, is being closely watched. They announced that they would push back against the U.S. They had previously announced 128 products last week and now we have more details as they have split those 128 products into seven groups, including U.S. pork, recycled aluminum, steel pipes, fruit and wine. The Chinese ministry will implement measures in two stages: first, a 15% tariff on 120 products including steel pipes, dried fruit and wine, and later, a 25% tariff on pork and recycled aluminum. NAFTA is also getting attention as President Trump once again has threatened to end the agreement unless a new agreement is reached soon. As of now, this is not a major threat to our economy, but further rhetoric/escalation or even a de-escalation can cause MBS to have some volatility.
(2) Jobs, Jobs, Jobs: There will be a ton of jobs data this week culminating with Friday’s big data dump with Unemployment Rate, Non-Farm Payrolls and Wages. The bond market will be focused on Average Hourly Wages as the YOY number is projected to hit 2.7%. The closer that number is to 3.00%, the worse it will be for pricing. If it wells below 2.5%, then it will be great for pricing.
(3) The Talking Fed: On Wednesday they will issue the Minutes from the last FOMC meeting where they raised interest rates for the first time this year.