Learn from the Past
Mortgage backed securities (MBS) gained just +12 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week. Over the past 4 weeks, the rolling average has seen a slight decline in mortgage rates.
It was a holiday-shortened trading session which was really only 3 full days of trading in the bond market. There was very strong domestic economic data (ISM Services, Jobs, Manufacturing) that would have normally caused mortgage rates to increase. But offsetting the strong data was concern over the start of the trade wars with China and to a lessor effect, Canada, Mexico and Russia. The uncertainty over the path of the trade wars has kept money into long term bonds where normally, it would flow out.
Jobs: Big Jobs Friday showed that the job market continues to be very strong.
June Non Farm Payrolls (NFP) 213K vs. est. of 195K.
May NFP revised upward from 233K to 244K.
April NFP revised upward from 159K to 175K.
The rolling three month average increased to 211K.
Wages: The MOM change in Average Hourly Earnings increased by 0.2% vs. estimates of 0.3% and is now $26.98. The YOY change is 2.7% which matched market expectations and last month’s pace.
Unemployment: The Unemployment Rate increased from 3.8% to 4.0% but that is only because more people are actually looking for work. This is reflected in an increase in the Participation Rate from 62.7% to 62.9%.
Services: The June ISM Non-Manufacturing Index (2/3 of our economy) had a very robust reading of 59.1 vs. estimates of 58.3. This is the third highest reading since 2005.
Manufacturing: The national ISM Manufacturing report was very robust and beat expectations with a 60.2 vs. estimates of 58.4. Input costs (ISM Prices Paid) were very lofty at 76.8 but were smidge lower than in May.
The Talking Fed
Tthe Minutes from the last FOMC meeting were issued. There were no real surprises in the minutes. They clearly are willing to let inflation run hotter in the near term and do have some concern over the impact of tariffs but overall feel that the economic risks to a trade war as being “balanced.”
Friday started the official kickoff of 25% tariffs on $34B worth of items from China and vice-versa. President Trump has said that the U.S. is ready with another $500B in tariffs on China if they don’t come to terms with a more equitable agreement and protect intellectual property rights.
What’s on the Agenda for this Week?
Backend pricing has gotten all that it is ever going to get out of the initial foray of the announced $50B tariffs ($34B started Friday). It will take a large escalation in trade wars with China, NAFTA and the EU for MBS to see further improvement over last week’s pricing. And most likely, the current level of tariffs will continue in place for a little while to see who blinks first. For today, look for MBS to close in the -6 to -19 range which simply gets it to the bottom of the channel.
The three things that have the greatest ability to impact your backend pricing this week are: (1) Trade Wars, (2) Geo-Political and (3) Inflation Nation.
(1) Trade Wars: This story continues to suck all of the oxygen out of the room. The initial tit-for-tat $34B in tariffs with China is less of a concern to long bond traders than what comes next. Does this escalate to a $200B war? Is there some agreement on some items that decrease the $34B down to $10B? Will progress be made on other fronts (NAFTA, Europe, etc.).
(2) Geo Political: A lot going on this week with Brexit taking on center stage as their Brexit Secretary just quit. President Trump will be traveling to the U.K. to meet with Prime Minister May and will be at the NATO summit on Wednesday and Thursday. Trump is also expected to announce his appointment for the Supreme Court and the bond market will react based upon if they are pro-business/less regulation or not.
(3) Inflation Nation: This week’s Consumer Price Index will get a lot of attention as the YOY reading is expected to climb to 2.3%. The impact of tariffs on raw material costs (PPI) and if they are transferred to the consumer in higher prices will be an important story.
Treasury Auctions this Week
07/10 3 year note
07/11 10 year note
07/12 30 year bond
The Talking Fed this Week
07/09 FOMC Neel Kashkari, ECB Draghi
07/11 Bank of Canada Interest Rate Decision, ECB Non-Monetary Meeting, Bank of England’s Carnery and FOMC John Williams
07/12 FOMC Patrick Harker
07/13 FOMC Raphael Bostic
It was a very light day for economic data and more importantly, there was no new news in the newly started trade war with China. As a result of new “fear” being injected into the system, MBS did exactly what experts thought they would today: making a small pull back from the 100 day moving average.
Consumer Credit: The headline number was more than double the market expectations ($24.56B vs. estimates of $12.50B). When you strip out student and auto loans and focus on Revolving Debt, you will find that it shot up by $9.8 billion to hit highest level since November.
On Deck for Tomorrow: Small Business Optimism, JOLTS and the 3 year Treasury note auction.
The fate of Brexit and the EU is up in the air as the person in charge of moving forward with process quit. Meanwhile, back in the good old U.S: The POTUS will announce his pick for the SCOTUS at 9:00pm EDT tonight.