Learn from the Past
Mortgage backed securities (MBS) lost 22 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.
Domestic economic data continued to show steady growth but bonds focused on geo-political news more than economic news last week. The United States has decided not to extend the agreement with Iran and we got a firm meeting date between President Trump and North Korea’s leader; we also received three “detainees” back from North Korea. Overall, this removed some of the “fear factor” support that has been in long bonds for some time.
Inflation Nation: April Headline Consumer Price Index was bang in line with market expectations (2.5% vs. estimates of 2.5% YOY). The closely watched core (ex food and energy) increased by 0.1% on a MOM basis which was lighter than expectations of 0.2% and YOY, it increased by 2.1% which matched March’s pace of 2.1% but was just off expectations of 2.2%.
April Producer Price Index was very close to market expectations. The closely watched core (ex food and energy) increased by 0.2% on a MOM basis which matched forecasts and increased by 2.3% vs. 2.4% on a YOY basis.
Small Business Optimism: The NFIB Index improved from 104.7 in March to 104.8 in April. Capital Expenditure Plans, Earnings and Adding Employees all showed good gains.
Jobs: Another blockbuster reading with the March JOLTS report with 6.550M openings reported which is a half-million more than in February.
The Talking Fed
Atlanta Fed President Raphael Bostic summed up the prevailing sentiment in the bond market perfectly last week when he said “swelling optimism over tax policy in the beginning of the year has now been replaced almost completely by uncertainty regarding the proposed tariffs and the possibility of a trade war,” and “I come away with the sense that for now, many firms may be responding to increased uncertainty by moving to the sidelines with respect to new cap-ex plans.”
What’s on the Agenda for this Week?
The only domestic data point this week of concern is Tuesday’s Retail Sales but even then it would have to be a huge variance from market expectations to even impact pricing. This is a big week for economic data from overseas which will carry much more weight with bond traders than our own domestic data. But it’s the fluid geo-political movements and trade talks that will carry the week. If anything gets done with NAFTA or China, look for MBS to sell off as huge uncertainties are removed from the market place. But if it is more of the same rhetoric, then look for MBS to remain in the exact same channel as last week.
The three areas that have the greatest potential to impact backend pricing this week are: (1) Across the Pond, (2) The Talking Fed and (3) Geo-Political
(1) Across the Pond: There will be some economic releases from world top economies that have some real “heft” to them this week. Generally, the stronger these reports are, the worse it is for pricing and vice versa.
China – Retail Sales, Industrial Production
Japan – GDP, Industrial Production, CPI
Germany – GDP, CPI, PPI
Eurozone – GDP,CPI and a Non-Monetary ECB Meeting.
We actually will hear from quite a few voting members of the ECB this week, starting off today with ECB member and Bank of France governor, Francois Villeroy de Galhau. He insisted that despite sluggish inflation, the governing council is set to stick with the plan and end QE over the near term, citing September or December as the likely cut off point, and warning that the first rate hike could come quarters, not years, after the end of asset purchases.
(2) The Talking Fed: There will be a lot of speeches from both voting and non-voting members of the FOMC. The aggregate tone of their speeches can shape markets.
05/14 Loretta Mester, James Bullard
05/15 Robert Kaplan. John Williams
05/16 Raphael Bostic, Atlanta Fed Business Inflation Expectations, Jame Bullard
05/17 Philly Fed Business Outlook Survey, Neel Kashkari
05/18 Lael Brainard, Robert Kaplan
(3) Geo-Political: NAFTA will get the bulk of attention from bond traders as the May 17th deadline imposed by Speaker Paul Ryan is fast approaching. Italy will continue to be a concern for the Eurozone/ECB. Trade with China continues to be closely watched as President Trump said he is working with Chinese President Xi to start to ease up on exports to ZTE. Also, China’s Vice Premier Lie He is traveling to Washington to continue talks with Treasury Secretary Steven Mnuchin.
Today was a big-fat nothing burger as there were no major economic releases and today’s Fed speeches gave nothing really new. As a result, MBS have just moved sideways all day.
On Deck for Tomorrow: Retail Sales, Empire State Manufacturing, Business Inventories, and the NAHB Builders Sentiment.
The Talking Fed
Cleveland Fed President Loretta Mester (voting member) said the Fed should continue its gradual approach to raising interest rates given that inflation has not yet reached the U.S. central bank’s 2% goal in a sustained way.
St. Louis Fed President James Bullard (non voting member, dovish and usually wrong but always entertaining) thinks that the U.S. yield curve could invert sometime later this year to early 2019. This would be in a market move in which short-term U.S. interest rates rise above longer-term bond yields and which has preceded recent U.S. recessions.
Across the Pond
Japan’s April YOY Machine Tool Orders hit 22.0%, a slightly slower pace than March’s 28.1%.