Learn from the Past
Mortgage backed securities (MBS) gained 57 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower for the week.
It was a holiday-shortened week with an early close on Friday. Geo-Political concerns were the main driving factor in pricing last week as investors poured money into the low-return but safe-haven of U.S. backed bonds. Traders also “parked” their funds into long bonds over the long weekend. This spike in demand for bonds caused rates to pull back to levels from two weeks ago.
U.S. Treasury Secretary Steven Mnuchin declared that the 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. The next day, China’s Ministry of Finance announced that it would slash passenger car duties to 15%, further opening up the market that’s been a key target of the U.S. in its trade fight with Beijing. Car parts will be slashed from 25% down to only a 6% rate.
President Trump called off the proposed summit with North Korea but left the door open for negotiations. He also signed the Dodd-Spank reform bill.
The Talking Fed
They issued the Minutes from the May FOMC meeting. The bond market viewed the overall tone of the Minutes as a smidge more “dovish” than the original policy statement on May 2 but not by enough to help MBS break above their channel. The word “symmetry” was used 9 times in the Minutes and the Fed basically stressed that inflation is HERE but that they will let it run over 2.00% before freaking out and raising rates at an accelerated pace. They will simply stay the course for awhile, and the markets will get their two more rate hikes this year.
What’s Happening this Week?
This is a holiday-shortened week which is packed full of big data releases and geo-political turmoil. MBS had an early spike due to Italy but have pulled back from those highs. MBS could make some real gains this week. Of course there are plenty of geo-political wild cards that could cause some volatility.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) Domestic Flavor and (3) The Talking Fed.
(1) Geo-Political: There is plenty of global concern to go around. Italy has imploded and threatens to take the EU down with it; U.S.-China concerns mount as the U.S. will now have a 25% tariff on Chinese technology goods; military escalations with Israel and Iranian backed forces; Brexit up in the air; and a G7 meeting…just to name a few areas of concern this week.
(2) Domestic Flavor: There will be some big domestic releases this week. The first revision (2nd release) of the 1st quarter GDP will get some attention but the two most important data points are Thursday’s PCE and Friday’s Jobs/Wage data.
(3) The Talking Fed: They will issue their Beige Book which is prepared by all 12 Fed districts to be used at the next Fed meeting. But they will also release their proposed changes to the Volker Rule.
MBS have blown past the 25 day, 50 day and have actually touched upon the 100 day MA in today’s session. The reason? A perfect storm of fear and anti-inflation (which is not the same as deflation). On the anti-inflation side, WTI Oil tumbled by almost 2% on rumors that OPEC is looking to ease output caps which would mean much more supply into the marketplace. Bonds lately have been punished by rising oil prices, so this is something that is reversing that trend. Next up is the Italian-implosion and the unknown consequences on the Eurozone which has sent any money NOT stuck in the Eurozone into the U.S.
Taking it to the House: The March’s Case-Shiller 20-City Composite Home Price Index rose at 6.79% YoY – the fastest price appreciation since June 2014.
On Deck for Tomorrow: Weekly Mortgage Applications, ADP Private Payrolls, Revised GDP, Fed’s Beige Book, Volker Rule Proposal.
Dallas Fed: Another regional Fed report shows strength. The Dallas Fed Manufacturing Business Index jumped to 26.8 which was much stronger than estimates of 23.3 and the prior reading of 21.8
Rome is Burning
Headlines continue to flow and yet another attempt at forming a coalition government has failed. The country has been trying to form a new government since March. Italy’s financial woes dwarf that of Greece and Greece almost took down the Eurozone on its own.
Italy has well over two trillion in debt and ZERO way to repay (grow) its way out of it. And the European Central Bank owns a BIG CHUNK of it. Spain is next in line, and recent events such as the independence vote in Catalonia (it passed but was struck down by the government that lost the vote) have any available liquid cash flowing to U.S. bonds.