Learn from the Past
Overview
Mortgage backed securities (FNMA 4.00 MBS) lost 40 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week.
Inflation concerns drove rates higher last week. Inflation is the number one enemy of long bond investors as it eats away at the real rate of return. We have solid economic growth and are seeing increased wages and input prices in some regional Fed manufacturing surveys which pressured MBS last week.
Domestic Flavor
Retail Sales: It was a mixed bag for the April data but the real story is the upward revisions to March. April Headline Retail Sales matched market expectations of a monthly gain of 0.3%. But March was revised upward from 0.6% to 0.8%. When you strip out Autos, Retail Sales improved by 0.3% vs. estimates of 0.5%. However, March was revised higher from 0.2% to 0.4%,.so actually without that revision, April matched market expectations.
Manufacturing: The regional Empire Manufacturing Survey was much stronger than expected (20.1 vs. estimates of 15.0). Of particular interest is that the survey responders were very concerned about import tariffs in April, but no so much in May.
Inflation Nation: Joining the recent PCE report that shows inflation over 2.0% (net of a drop in auto prices), the NY Fed’s UIG inflation metric shows inflation to be 3.1% and the Atlanta Fed’s Sticky Inflation metric shows inflation to be 2.5%
Leading Economic Indicators: The April reading hit 0.4% which matched expectations and March was revised upward from 0.3% to 0.4%. The report showed a rise in the factory work week but contained no surprises.
April New Housing Starts were lighter than expected (1.287M vs. estimates of 1.310M). But March was revised upward from 1.319M to 1.336M. Building Permits were higher than estimates (1.352M vs. estimates of 1.350). The prior month was also revised upward, from 1.354M to 1.377M. Single-family permits rose 0.9 percent to an 859,000 rate.
Philly Business Outlook: The May Philadelphia Fed Business Outlook Survey jumped to a very robust reading of 34.4 vs. estimates of 21.0 and included a new 45 year high for new orders. Selling prices increased by 7 points which is the highest levels since 1981.
The Talking Fed
Dallas Fed President Robert Kaplan thinks we are at full employment. He said, “Our judgment at the Dallas Fed is that we are either at or already past full employment.”
What’s Happening this Week?
Overview
This is a holiday-shortened week followed by a long weekend with the bond market closing early on Friday and then not reopening until Tuesday. There are no domestic data points that have the gravitas to move pricing but the “Three Things” noted below certainly have the ability to create some volatility. Look for MBS to trade in the +12 to -12 range unless there is some unexpected geo-political news.
Three Things
The three things that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) The Talking Fed and (3) Oil.
(1) Geo-Political: U.S. Treasury Secretary Steven Mnuchin declared that looming U.S. – China trade war is “on hold.” The U.S. will hold off on implementing tariffs and China has agreed to purchase more from the U.S., specifically from the agriculture segment. Also, NAFTA is still a major concern as the administration is now focusing on a “skinny” version of NAFTA. Italy’s debt problems and Brexit will also garner plenty of attention from traders.
(2) The Talking Fed: The two biggest events of the week are the release of the Minutes of the last FOMC meeting and Friday’s speech by Fed Chair Powell. The Minutes will be combed over for more details on their discussions about the injection of their new word “symmetry” as it relates to their target inflation rate.
It’s a pretty full schedule this week:
05/21 Raphael Bostic, Patrick Harker, Neel Kashkari
05/22 Richmond Fed Mfg Index
05/23 FOMC Minutes
05/24 William Dudley, Kansas City Fed Index, Patrick Harker
05/25 Jerome Powell, Robert Kaplan and Charles Evans
(3) Black Gold: WTI Oil prices have risen from $50.73 on May 21, 2017 to $71.39 on May 21, 2018. And the recent push above $70 has certainly increased both awareness and concern over inflationary input costs. As WTI Oil marches towards $75 and Brent towards $80, it will pressure MBS.
Market Wrap-up
Overview
A big snooze-fest for the bond market today. Besides the “no trade war” news, there was really nothing for the bond market to react to.
Domestic Flavor
There were no domestic economic releases today.
On Deck for Tomorrow: Richmond Fed Manufacturing Index, 2 year Treasury Note Auction
The Talking Fed
Atlanta Fed President Raphael Bostic said that the U.S. economy is close to meeting the Fed’s employment and inflation goals, with growth of around 2.5% expected this year.
Philly Fed President Patrick Harker is on board with 3 more rate hikes this year if needed. He said, “It is possible that we see an acceleration of inflation that I could be supportive of a third” rise.