Learn from the Past
Mortgage backed securities (MBS) lost just 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
The bond market (specifically MBS) was once again range-bound with very solid resistance and support levels that were tested and that held. The biggest economic report of the week was Retail Sales but it took a back seat to global concern over Trade talks.
Retail Sales: July was hotter than expected but part of the reason was due to revisions in June more so than a big surge in spending. The Headline Number increased by 0.5% vs. estimates of 0.1%, but June was revised lower from 0.5% down to 0.2%. When you strip out the volatile Automobile market, then Retail Sales hit 0.6% vs. estimates of 0.3%. June was revised lower from 0.4% to 0.2%.
Manufacturing: The August Empire Manufacturing Index (NY) crushed it with a 25.6 vs. 20.0 estimates. The Preliminary Q2 Non-Farm Productivity report was much better than expected with a 2.9% vs. 2.3% improvement. But the Q1 data was revised lower from 0.4% to 0.3%. Q2 Unit Labor Costs actually fell by 0.9% vs. estimates of +0.3%, but Q1 was revised higher from 2.9% to 3.4%. The July Industrial Production was lighter than expected (0.1% vs. estimates of 0.3%) but that was due to a revision from 0.6 to 1.0 in May. Capacity Utilization at 78.1% vs. estimates of 78.2%.
Taking it to the House: Housing Starts and Building Permits both improved but remained at low levels as land, labor and raw material costs make it almost prohibitive to build on the lower end of the price range (where all the demand is). Housing Starts hit 1.168M vs. estimates of 1.260M. Permits hit 1.311M vs. estimates of 1.310M. The bright spot in permits is that SFR are up 6.4%.
Consumer Sentiment: The Preliminary August Reading was lighter than expected with a 95.3 vs. 98.0 estimate which is the lowest since September. This will be revised though.
Leading Economic Indicators: The composite index of 10 components rose to 0.6% in July vs. estimates of 0.4%. Inflation Expectations picked up in the 5 to 10 year horizon.
The Wall Street Journal reported that Chinese and U.S. negotiators are drawing a “road map” for talks to end the trade deadlock, culminating with meetings between U.S. President Trump and Chinese President Xi at multilateral summits in November, citing officials in both nations. As part of preparation for the November summit, the two nations have scheduled the previously disclosed mid-level talks in Washington next week.
What’s on the Agenda for this Week?
There are no domestic data points that have the ability to impact pricing this week. It will take some sort of significant and real development in trade for MBS to see any real change in trajectory. Even the Fed’s commentary will be viewed through the trade-lenses by bond traders. In the absence of significant movement in the Trade Snores, look for continued sideways movement in pricing.
The three things that have the greatest ability to impact backend pricing this week are: (1) Trade Snore, (2) The Talking Fed and (3) Across the Pond
(1) Trade Snore: Top White House officials say they are on the “verge” of crafting a final deal with Mexico but Canada has not been a part of the deal with Mexico. Meanwhile a contingent from China will be in D.C. this week as part of their “road map” to a meeting between the two presidents this fall.
(2) The Talking Fed: They will issue the minutes from their last FOMC meeting on Wednesday. While they did not raise rates at that meeting, the policy statement was more “hawkish” than the prior statement and certainly set the table for a rate hike at the next meeting. The Kansas City Fed will host their Annual Jackson Hole Wyoming Symposium and Fed Chair Powell will speak on Friday at that symposium.
(3) Across the Pond: Our domestic data will not have an impact on MBS, and most likely neither will the data from overseas. But there are some very key releases which include manufacturing PMI and GDP from several of the top 5 world economies.
There were no domestic events today; as a result, MBS drifted upward to trade just at the edge of the “danger zone,” which is typical on a day without any hard data to guide trades. President Trump made more headlines as he said that he wanted the Fed to NOT raise interest rates which, of course, is a horrible idea. The Fed MUST raise rates to keep the economy growing too hot, but they need to do so very gradually…they are probably already behind the curve.
There were no releases today, and nothing on deck for tomorrow.
Across the Pond
Germany: PPI YOY matched expectations with a 3% reading.
The Talking Fed
Atlanta Federal Reserve Bank President Raphael Bostic said that he is sticking with his expectation of only one further interest rate increase this year as recent global events add some downside risk to a strong U.S. economic outlook.