Learn from the Past
Mortgage backed securities (MBS) lost -32 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.
The bond market was under pressure (higher rates) due to inflationary data (CPI 2.4%) and several major bond funds (most notably PIMCO) recommending lightening up on bond holdings. Global military and geo-political concerns kept MBS from selling off even more.
Jobs, Jobs, Jobs: The February Job Openings and Labor Turn Over Survey (JOLTS) continues to show over 6 million unfilled jobs which shows that employers are having major issues finding qualified workers to fill the open positions.
Consumer Sentiment: The Preliminary April reading was a miss to the downside (97.8 vs. estimates of 100.6). This will be revised but it shows a pullback in sentiment from our recent historic highs.
PIMCO Says Sell: The world’s largest bond fund, PIMCO, said that it’s time to take profits…now. Dan Ivascyn, the man who replaced Bill Gross as CIO, and the man responsible for allocating hundreds of billions in client funds, said that geopolitical tensions and rising interest rates have created a “much more fragile situation”.
Inflation Nation: The March Consumer Price Index matched market expectations but did show an increase in the pace of inflation for consumers and we saw a rare “two handle” on the Core YOY number. Headline CPI YOY hit 2.4% vs. estimates of 2.4% but that is up from Feb’s pace of 2.2%. The Core CPI YOY hit 2.1% which matched estimates but it was a hotter pace than February’s rate of 1.8%.
The Talking Fed
The Minutes from last month’s FOMC meeting were released.
You can read them here.
Overall, the Minutes reveal that the Fed is shifting away from accommodative policies. Here are some of the highlights:
– Recent fiscal policy changes (tax reform) could lead to a greater expansion in economic activity over the next few years than the staff had previously projected.
– A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2% over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.
– Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.
– Many participants stated that recent readings from indicators on inflation and inflation expectations increased their confidence that inflation would rise to the Committee’s 2% objective in coming months and then stabilize around that level; others suggested that downside risks to inflation were subsiding.
– Regarding wage growth at the national level, several participants noted a modest increase, but most still described the pace of wage gains as moderate; a few participants cited this fact as suggesting that there was room for the labor market to strengthen somewhat further.
– Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy.
What’s on the Agenda for this Week?
Now that this weekend’s military action has come and gone, MBS gave up a little of their “fear factor premium” in early trading but the support level has held so far as that whole situation could turn uglier at any moment. Even though our Retail Sales were stronger than expected, there really isn’t any domestic economic data that can break MBS out of the very well-defined trading channel this week. If they are to break out of it, it has to come from military escalation and/or trade war escalation. Barring those non-data events, MBS have no reason to improve.
The three things that have the greatest ability to impact backend pricing this week are: (1) Geopolitical, (2) Across the Pond and (3) The Talking Fed.
(1) Geopolitical: So far, the weekend military action in Syria has not caused a direct escalation between the U.S., Russia and others. The market will be very reactive to any escalation. Separately, concerns over a trade war continue to increase between the U.S. and China.
(2) Across the Pond: The International Monetary Fund will be meeting this week and the main subject will be how to adjust to tariffs and a potential trade war. But there will also be very key GDP data out of China. The Bank of Japan will announce their latest asset purchase program levels and the Bank of Canada will announce their interest rate and policy decision.
(3) The Taking Fed: There will be a lot of speeches this week and the bond market will be focused on inflation, concern over tariffs and path of rate hikes.
– 4/16 Bostic, Williams
– 4/17 Williams, Quarles, Harker and Evans
– 4/18 Dudley, Fed’s Beige Book
– 4/19 Mester
– 4/20 Evans and Williams
MBS took a nose dive (-21BPS) in early trading as some of the “fear factor” premium was removed after the weekend. Retail Sales Ex-Autos matched expectations and were not a major factor in pricing. The floor of support once again held up nicely and MBS got a nice gradual bounce off that strong technical level.
Retail Sales: The March Headline Retail Sales report was stronger than expected with a 0.6% vs. 0.4% estimates. But when you strip out autos, Retail Sales matched expectations with a 0.2% reading. Department stores continue their free-fall but restaurants and furniture sales climbed higher.
Consumer Sentiment: The April NAHB Housing Market Index came in at 69 vs. estimates of 70. Anything above 50 is positive, so a reading of 69 is still quite good.
On Deck for Tomorrow: Housing Starts, Building Permits, Industrial Production, Capacity Utilization and several Talking Feds.
The Talking Fed
Dallas Fed President Robert Kaplan (non-voting member) said he expects the U.S. central bank to raise interest rates three times this year and further next year to levels that could put the brakes on U.S. economic growth.