Learn from the Past
Mortgage backed securities (MBS) lost just 4 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move basically move sideways for the week.
Opposing forces. Overall, the economic data was very strong last week (ISM and Jobs) which is generally negative for MBS trades and therefore negative for rates. But, global uncertainty over a potential trade war between the U.S. and China provided support for MBS. The two opposing forces “squeezed” MBS into a very narrow and tight range.
Jobs: There was a lot of labor/wage related data on Friday. Here is the Tale of the Tape:
March Non-Farm Payrolls (NFP) was much lighter than expected 103K vs. estimates of 193K.
February NFP was revised upward from 313K to 326K.
January NFP was revised downward from 239K to 176K.
The rolling three month moving average is now 202K, so it’s still above the important 200K mark.
Overall, this was a solid report. Yes, NFP was a miss, but the Fed (and the markets) focus on the rolling three-month average which is still above 200K which is very strong. Wages were up 2.7% YOY which is also strong but matched market expectations.
Wages: Average Hourly Earnings increased by 0.3% vs. est. of a 0.2% gain on a MOM basis. Average Hourly earnings are now $26.82. The more closely watched YOY number increased by 2.7% which matched market expectations and was a small improvement in the yearly pace of increases than the Feb pace of 2.6%.
Unemployment Rate: The March Unemployment Rate remained at 4.1%. The market was expecting a small decrease, down to 4.0%.
The Participation Rate (which drives the Unemployment Rate) moved from 63.0% in February, down to 62.9% in March.
ISM Non-Manufacturing: The March reading for the Services sector hit 58.8 vs. estimates of 59.0, which is a very robust reading. The services sector accounts for more than 2/3 of our economy, so this reading gets more weight than the ISM Manufacturing data.
The Talking Fed
Fed Chair Jerome Powell did not say anything to shock the markets. He indicated that the Federal Reserve would likely need to keep raising U.S. interest rates to keep inflation under control and that it was too soon to know if rising trade tensions would hurt the U.S. economy.
What’s on the Agenda for this Week?
This will be another week that is not driven by data. It’s central-bank-palooza out there with key speeches and releases from our own Fed, but more importantly from the People’s Bank of China, the Bank of Japan and the European Central Bank. These key speeches will shape how bond traders view the path of the “collective” global monetary policy. Barring any real shift of sentiment among those that actually write checks for long bonds, look for MBS to continue to trade in the same relative range as last week.
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Geo-Political, (2) The Talking Fed and (3) Inflation Nation.
(1) Geo-Political: The bond market will continue to give the majority of its focus on trade talks between China and the U.S. as well as “tweets” over the progress of those talks. Don’t forget about NAFTA as the deadline is fast approaching. The White House is also pushing to make some of the tax cuts permanent.
(2) The Talking Fed: The Minutes from the last FOMC meeting will be issued, where they raised their key interest rate on Wednesday. Here is their schedule for this week:
04/10 – Robert Kaplan
04/11 – FOMC Minutes
04/12 – Neel Kashkari
04/13 – Eric Rosengren, James Bullard
(3) Inflation Nation: There will be a couple of key reports this week with Wednesday’s CPI getting the most attention of bond traders. There will also be PPI and Import Prices this week.
The Treasury will be dumping more debt in to the market place this week:
04/10 – 3 year note
04/11 – 10 year note
04/12 – 30 year bond
A mild open to the week with MBS moving in the 0 to -11 BPS range as there were no major economic releases today, and although there was plenty of Trade War rhetoric, there was actually no new policy that was announced nor implemented.
There were no economic releases today.
On Deck for Tomorrow: Producer Price Index, Wholesale Trade and a 3-year Treasury Note auction.