Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 1 basis point (BP) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
The bond market (specifically MBS) was range-bound with very solid resistance and support levels that were tested and that held. It was a fairly light week for economic data but the data that we did get was solid.
Inflation Nation
The July YOY Consumer Price Index was a smidge hotter than expectations with the Core (ex food and energy) beating expectations with a 2.4%YOY gain vs. estimates of a 2.3% gain. The Headline CPI matched expectations with a YOY gain of 2.9% which also matches last month’s pace. The July YOY Producer Price Index was one tick off of expectations (3.3% vs. estimates of 3.4%) but still at very elevated levels. When you strip out the more volatile food and energy, the YOY Core reading was 2.7% vs. estimates of 2.8% which is well above the Fed’s target inflation rate of 2.0% even though they use PCE instead of PPI to measure inflation.
Jobs
The job market is still wide open. The June Job Openings and Labor Turnover Survey (JOLTS) showed that there were 6.662M unfilled jobs which was higher than the market forecasts of 6.646M. For the third straight month, there were actually more jobs available than there are people looking for work.
Economic Optimism
The IBD/TIPP August reading shows that consumers are not scared of the Trade Snore. The August reading was higher than expected (58.0 vs. estimates of 57.2) and is one of the highest readings in history.
What’s on the Agenda for this Week?
Overview
There aren’t any Treasury auctions or Talking Feds this week. The Geo-political and trade snore news will get the lion’s-share of the attention this week. But our Retail Sales need to be closely watched as well. MBS are expected to continue to trade near the top of the range of the trading channel and may even pop into the “danger zone” here and there but trading in the “danger zone” and staying in it are two different things.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade Snores, (2) Geo-Political and (3) Domestic Flavor.
(1) The Trade Snore: Other than words, there really hasn’t been any significant changes or new policies from either China or the U.S. Any actual agreement will calm the markets and therefore push rates higher but most likely we will see more “war of the words” this week and not any real policy.
(2) Geo-Political: Turkey and their collapsing currency, financial market and economy will get plenty of headlines. As of now, they are not viewed as a larger cotangent but that could change. The Brexit will also get some attention as they begin another round of exit negotiations in Brussels this week. The continued spat between the Saudis and Canada will also be closely watched.
(3) Domestic Flavor: There will be some important reads this week that will help to shape up expectations and forecasts for the 3rd quarter GDP. Retail Sales on Wednesday will get the most market attention this week.
Market Wrap-up
Overview
A very light start to the week with zero economic data (foreign or domestic) to impact pricing. There was nothing new on the Trade Snore front either.
Domestic Flavor
There were no major (or minor) economic releases today.
On Deck for Tomorrow: Small Business Optimism, Import and Export Prices.
Congressional Budget Office
The CBO revised their internal expectations for growth, inflation and rates (three words that really mean the same thing as far as bonds are concerned). Their total GDP for 2018 was revised from 3.3% down to 3.1% which is still a very high rate. They kept their 2019 GDP forecast at 2.4%, citing an escalating trade war as their reason for the revision.