Learn from the Past
Mortgage backed securities (MBS) lost 16 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher for the week.
Overview: GDP was strong (4.2%), and Inflation at 2.3% (Headline PCE), Consumer data and Manufacturing data were all very strong. All that positive data means growth and that is always something that will pressure long bonds and increase interest rates. While Mexico and the U.S. appear to have a trade deal, the uncertainty of Canada joining in has provided some support for bonds which has diminished the downward pressure from the strong economic data.
PCE: The Fed’s preferred measure of inflation hit a six year high as the Core PCE number finally hit 2.0% (the Fed’s target rate). The Headline PCE number continues to trend above 2.0% with a 2.3% vs. estimates of 2.2%. Spending picked up by 0.4% on a MOM basis and Income grew by 0.3%, both matched market expectations.
Manufacturing: The bellwether Chicago PMI continues to deliver very robust readings. The August reading hit 63.6 vs. estimates of 63.0. Any reading above 50 is good and readings above 60 are extremely positive for the economy.
Consumer Confidence: The August reading was very robust, coming in at 133.4 vs. estimates of 126.5. This is the highest reading since 2000.
Consumer Sentiment: The August University of Michigan’s Index was revised to 96.2 from 95.3, a very strong reading.
GDP: The 2nd quarter GDP was revised upward from the originally reported 4.1% to 4.2%, the market was actually expecting a downward revision from 4.1% down to 4.0%, so this was a fairly nice beat to the upside.
The Talking Fed
The Senate confirmed Trump nominee Richard Clarida by a 69-26 vote as the Vice Chairman of the Federal Reserve. He replaced the void left by William Dudley. Clarida was a big fund manager at PIMCO at the time when PIMCO was the world’s largest bond trader.
What’s on the Agenda for this Week?
Welcome back! I hope you had a great long weekend! MBS were expected to move into a lower trading channel and they did. This week, it is a very strong possibility that there will be “another leg down” and a move into a slightly lower trading channel than last week even. The economic data has just been too strong for bond traders to take risk against growth/inflation. While the uncertainty of Trade Wars has been a parachute…slowing the fall of MBS prices…it cannot completely stop MBS in mid-air. This is a very packed week with lots of Fed speeches, an EU Finance Ministers meeting, lots of trade talk and some heady economic data. This is another week where some pressure on pricing is expected…just how much depends on trade.
The three areas that have the greatest potential to impact backend pricing this week are: (1) Trade Wasr, (2) Jobs, Jobs, Jobs and (3) Domestic Flavor.
(1) Trade Wars: President Trump has told Congress that it’s okay to move ahead with just a Mexico-U.S. agreement. Meanwhile, Friday’s deadline with Canada has been extended to this week. But the bond market will react the most to any movement on the talks with China.
(2) Jobs: Friday’s Jobs data will be very key with bonds paying the most attention to wages as the YOY reading is expected to tick up to the 2.8% range.
(3) Domestic Flavor: Besides Jobs, there is a lot of big economic data with the gravitas to move MBS pricing. ISM Manufacturing and Non-Manufacturing are the most important.
The Talking Fed: There will be a lot of “Fed speak” this week.
09/05 John Williams, Neel Kashkari and Raphael Bostic
09/06 John Williams
09/07 Robert Kaplan, Eric Rosengren and Loretta Mester
The holiday-shortened week kicked off with plenty of headlines. But neither confirmation hearings nor the release of a book have anything to do with bond trades. MBS are down today in direct response to a very strong ISM Manufacturing report. This may already be the “leg down” that was expected this week but it is too early to tell with just one trading session.
Manufacturing: The August ISM Manufacturing Index jumped to 61.3 vs. estimates of 57.7. This is the best reading since January. Any reading above 60 is rare for this report and very robust. ISM Prices Paid hit 72.1 vs. estimates of 70.2…a very lofty level and yet another report that shows pricing pressures (inflation).
Construction Spending: The July reading was lighter than expected (0.1% vs. estimates of 0.5%) but that is partially due to an upward revision to June from -1.0% to -0.8%.
On Deck for Tomorrow: Weekly Mortgage Applications, International Trade and several talking feds.
Across the Pond
Canada: Bank of Canada will announce their Interest Rate Decision tomorrow.
Down Under: Australia kept their key interest rate at 1.5%.
Eurozone: PPI YOY 4.0% vs. estimates of 3.9%.