Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 4 basis points from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
There was a net change of just 4 basis points. Generally, it takes around a 21 basis point movement for rates to be impacted. MBS traded in a very narrow range with significant resistance at the 50 day moving average. The market focused on trade war jabs and the OPEC meeting. Our domestic economic data was once again solid but had no impact on rates.
Taking it to the House
Weekly Mortgage Applications jumped by 5.1%. Refinances led the way with a 6.0% increase. Purchase applications increased by 4.0%. Existing Home Sales were close to expectations (5.43M vs. estimates of 5.52M) in May. As usual, tight inventory and rising prices are restricting sales at higher levels. May Housing Starts were stronger than expected with a seasonally adjusted annualized pace of 1.350M Units. When you strip out the multi-family sector, SFR saw a 3.9% increase with a 936K pace. Building Permits were lighter than expected with a pace of 1.301M units. SFR Permits decreased by 2.2% with a 844K pace.
The Talking Fed
Fed Chair Jerome Powell said that there is robust growth and a generational low in unemployment. In his prepared remarks he said, “Earlier in the expansion, as the economy recovered, the need for highly accommodative monetary policy was clear, but with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.”
Trade Wars
After last week’s $50B in tariffs, President Trump directed the U.S. Commerce Department to identify $200 billion worth of China goods for an additional 10% of tariffs. China said that it would respond “in kind” but they can’t as they purchase less than $200B worth of goods from the U.S. Actually, when you back out the $50B that they have already announced, that would leave only $150B that they could issue tariffs on but they don’t buy that much from us…so it is unclear as to how they could match the U.S. tit-for-tat.
What’s on the agenda for this Week?
Overview
MBS will be focused on Europe and trade wars more so than our economic data. Look for the 50 day moving average to be tested and MBS may even close above it for a day or two but then will most likely return to trading back below it on a longer term trend line.
Three Things
The three areas that have the greatest ability to impact mortgage rates this week are: (1) Geopolitical, (2) Trade wars and (3) Domestic.
(1) Geopolitical: All eyes are on Europe, as Germany’s Merkel is potentially on her way out and there’s a big EU Summit in Brussels on Thursday and Friday. They’ll discuss the latest trade war developments and Brexit, as well as migration policy, the EU budget, security and reforming the economic and monetary union.
(2) Trade wars: Putting more pressure on China, the White House is said to be considering banning Chinese companies from investing in U.S. technology and would block even more technology-based exports to China. Also in the works is a tariff on European autos imported into the U.S.
(3) Domestic: Inflation Nation – the Fed’s “official” measure of inflation will be released on Friday with the PCE report. There will also be the third release of the 1st quarter GDP, but that’s old data at this point. Consumer confidence and consumer sentiment will get some mild attention. Chicago PMI on Friday will be very closely watched.
Treasury Auctions this Week
06/26 2 year note
06/27 5 year note
06/28 7 year note
Fed this Week
06/26 Raphael Bostic, Robert Kaplan
06/27 Eric Rosengren
06/28 James Bullard
Market Wrap-up
Overview
At one point today the stock market (as measured by the DJIA) was down 500 points, yet MBS did not rally. Instead, MBS were also down. Just another example how MBS and the stock market are no longer related in any shape or fashion. It was a fairly quiet day without any major economic releases. As a result, MBS remained just below the “danger zone.”
Taking it to the House
May New Home Sales jumped 6.7% to an annualized rate of 689K units. The market was expecting 667K.
Manufacturing: The Dallas Fed Manufacturing Index jumped to 36.5 vs. estimates of 18.2 which is very hot.
Trade Wars
The White House was said to be considering banning Chinese companies from investing in U.S. technology and would block even more technology based exports to China but have moved off of those threats this afternoon.
On Deck for Tomorrow
Consumer Confidence, Home Price Index, Richmond Fed Mfg. Index and a 2 year note auction.