Learn from the Past
Mortgage backed securities (MBS) gained just +3 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
Just a net three basis point move for the entire week seems really tame on the surface but in reality, it was a very volatile week with mortgage rates increasing Monday through Wednesday. There was a swing of -57BPS from the best pricing of the week (lower rates) to the worst pricing of the week (higher rates). Overall, it was another week with stronger than expected domestic economic data with strong GDP and Durable Goods data as well as very high Consumer Sentiment and Consumer Confidence levels, which did combine to pressure pricing but a more “dovish” than expected European Central Bank and Bank of Japan helped MBS to climb off of their worst levels of the week.
Jobs, Jobs, Jobs: The Employment Cost Index for the 1st quarter showed an increase of 0.8% vs estimates of 0.7% with Wages and Salaries up 0.9% and benefits up 0.7%.
GDP: The Preliminary 1st quarter GDP was hotter than expected with at 2.3% vs 2.0% estimated growth rate due to a sharp rise in service spending (2.3%) while consumer spending increased modestly (1.1%). The quarter-over-quarter PCE increased by 2.7% vs estimates of 2.6%.
Durable Goods: The preliminary March reading (will be revised) saw a much stronger than expected reading on the headline number with a 2.6% MOM gain vs expectations for a 1.6% gain. Plus, February was revised upward from 3.1% to 3.5%. But when you strip out the volatile Transportation sector, the Core Durable Goods reading was flat at 0.0% which was lower than market expectations calling for a small gain of 0.5%.
Consumer Sentiment: The Final April University of Michigan’s Consumer Sentiment Index rose to 98.8 vs estimates of 98.0.
Consumer Confidence: The April MOM reading hit 128.7 vs estimates of 126.1 with is a block-buster type reading and reflective of consumers seeking larger net paychecks due to the tax cuts.
Taking it to the House: The March Existing Home Sales data was stronger than expected, rising 1.1% vs estimates of 0.2%. Key takeaways: Median Sales Price increased to $250,400 and marks the 73rd straight month of year-over-year gains. Inventories fell to 3.6 months of supply and the average time on market dropped from 37 days in Feb to 30 days in March with just over 50% of all inventory selling in 15 days or less.
What’s on the Agenda for this Week?
It will take a much more “dovish” than expected Fed on Wednesday and a drop in average hourly earnings closer to the 2.0% range than the expected 2.7% for MBS to break towards truly better pricing. Unfortunately, experts put the odds at both of those events occurring as remote. So, expect current trading channel to hold this week which basically means very little upside at all for pricing as MBS are already trading at the top of the channel.
The three areas that have the greatest ability to impact back-end pricing this week are: (1) The Talking Fed, (2) Jobs, Jobs, Jobs and (3) Domestic Flavor.
(1) The Talking Fed: The Federal Reserve Open Market Committee (FOMC) will start two days of meetings on Tuesday, and on Wednesday at 2:00 pm they will release their latest interest rate decision and policy statement. Currently, the market only has about a 33% chance of a rate hike at this m meeting largely due to the fact that this is one of the meetings that does not have a live press conference with the Fed Chair Jerome Powell.
(2) Jobs, Jobs, Jobs: There will be a huge amount of labor and/or wage related data this week that culminates in Friday’s Unemployment Report. The bond market will be paying very close attention to the first revision to the March NFP report and the YOY Average Hourly Earnings which came in at 2.7% in March. Throughout the week, there will be ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Unit Labor Costs, and some internal components of Chicago PMI and the ISM releases.
(3) Domestic Flavor: Besides a bevy of jobs related data, there will be some very big releases this week. It starts off with PCE (The Fed’s official measure of inflation), and then key readings in manufacturing with Chicago PMI, ISM Manufacturing, Factory Orders and Productivity. There will also be data on the services sector which is more than 2/3 of our economy with the ISM Non-Manufacturing reading.
MBS had a very mild day and have been testing the ceiling of resistance all day – hovering in the +4 to +9 range for most of the session. There were some big name reports that showed real inflation and strong manufacturing but neither report was far from the market expectations. WTI made another move higher. Really, MBS should have been under a little more pressure today but it looks like traders are on hold until the FOMC meeting.
Fed’s Target Rate Met?
It looks like it. While the Fed’s official measure of inflation is the Personal Consumption Expenditures (PCE), there are several key reports that are all at 2.00% or above. Let’s take a look (all reports have been released in the last 30 days):
PCE YOY – 2%
Average Hourly Earnings – 2.7%
GDP – 2.3%
CPI YOY – 2.4%
PPI YOY – 3.0%
WTI Oil – $68.89 now vs. $48.84 1 year ago, 36.36% increase
PCE: The March YOY Headline PCE showed an increase from 1.7% in February to 2.0% in March. The Core (Ex food and Energy) reading moved from 1.6% in February to 1.9% in March. Both of these data points matched the market expectations.
Manufacturing: The April Chicago PMI showed an increase from 57.4 in March to 57.6 in April. The market was expecting 57.9. Any reading above 50 is expansionary and a reading near 60 is very strong.
Taking It to the House: March Pending Home Sales increased by 0.4%; the market was expecting 0.9%. Pending Home Sales in California actually dropped 1.1% due to no inventory and dragged the composite number lower than it otherwise would have been.
On Deck for Tomorrow: FOMC begins two days of meetings, ISM Manufacturing and Construction Spending.