Learn from the Past
Overview
Mortgage backed securities (MBS) lost 37 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week. It was the third straight week of higher rates with MBS selling off a total of -76 basis points over the past three weeks.
Across the board, there was strong economic data in just about every sector. There was inflation in the CPI release, a strong job market in the JOLTS report, a record reading in Small Business Optimism and a very strong Consumer Sentiment reading. Even Retail Sales were solid when prior revisions were taken into account. The bond market also shifted to put more probability of a Fed rate hike in September AND December despite the overhang of tariffs. This combination of growth and inflation pressured long bonds and moved mortgage rates to the highest levels since May.
Domestic Flavor
Retail Sales: At first glance, the August data may look weaker than expected, but not really. The headline reading hit 0.1% vs. estimates of 0.4%. So, it looks light. However, that is only due to the fact that July was much more robust than originally reported and revised upward to a gain of 0.7%. Ex-Autos…same story as the reading was 0.3% vs. estimates of 0.5% but July was revised upward to 0.9%. Gas station sales, restaurants and ecommerce all had solidreta gains.
Industrial Production: Surged the most since 2010, rising by 0.4% in August. July had a major revision upward from 0.1% to 0.4%. Mining jumped (oil production) and utility usage jumped as the nation ran A/C units non stop during the hot months of July and August.
Consumer Sentiment: The preliminary University of Michigan survey for September, jumped to 100.8 vs. estimates of 96.6. It is the second highest reading this year.
Inflation Nation: The August Consumer Price Index (CPI) was lighter than expected but not as much as Wednesday’s PPI miss. The headline YOfedY CPI showed a 2.7% increase vs. expectations of an increase of 2.8%. The Core (ex food and energy) came in at 2.2% vs. estimates of 2.4%.
Jobs, Jobs, Jobs: The Job Openings and Labor Turnover Survey (JOLTS) report hit another new all-time record high with a reading of 6.939M jobs that are unfilled. It is the seventh straight reading above 6M.
Small Business Optimism: The August NFIB Index jumped to 108.8 vs. estimates of 108.1. This is now a new all-time record since this index was created 45 years ago. The survey saw gains in plans to increase inventories, to make more capital outlays and to increase employment.
The Talking Fed
They released their Beige Book. Overall, the report painted a very strong economic picture. Here are some key highlights:
- The word “tariff” was used 41 times compared to 31 times in July.
- Despite concern over tariffs, the U.S. economy is expanding at a “moderate pace” with tight labor market conditions.
- All 12 districts cited major labor shortages and a tight labor market among high-skill workers but also a number of districts noted shortages of lower-skilled workers at restaurants, retailers, etc.
- Wage growth was mostly characterized as modest or moderate, though a number of districts cited steep wage hikes for construction workers.
What’s on the Agenda for this Week?
Overview
The week opens at yet a new and lower-level trading channel, marking the 4th “leg down” that we have seen in 7 weeks. This is a “lame duck” week as the Fed is in news/media black-out mode one week prior to their Fed Meeting where the market now has a 100% probability of a rate hike priced in. There are no domestic economic release this week that have the ability to impact pricing. The Trade War saga will be the sole driving force behind pricing. While a fresh batch of tariffs may hit today/this week, they will be at a lower level than originally touted and will have less of an impact on MBS trades as a result. Look for more pressure on MBS this week. The only wild card that could possibly help pricing is China’s response, they actually can’t match us with tariffs because they simply don’t import as much from us…so it will be their “out of the box” response that will get a lot of attention.
Three Things
The three areas that have the greatest ability to impact MBS pricing this week are: (1) Tariffs/Trade Wars. Wait..you want the other two? They don’t exist. While there is a lot of housing news this week, it is all lower-tier data which means none of this week’s economic releases have the gravitas to change how long-bond traders view the future prospects for Fed rate hikes and domestic growth. We do have one Central Bank meeting (Bank of Japan) but the markets are not expecting anything out of them.
(1) Trade Wars: After discussions this weekend with Chinese trade representatives didn’t produce any notable results, President Trump has said he will move forward with an announcement (perhaps as soon as Monday) with $200B in newly enforced tariffs. Please note that these tariffs have been “dangled” out there for the past three weeks and this is not a surprise. And actually, the final version of these tariffs are supposed to be a lower rate than they were originally proposed.
Housing Data
While these reports do not impact pricing, they will give a good “report card” on what the housing market is doing. This week will be the NAHB Index, Building Permits and Housing Starts and the most important housing report that there is….Existing Home Sales on Thursday.
Market Wrap-up
Overview
The $200B in new tariffs have not materialized as of yet. The White House says that an announcement may come after the market closes, but so far…just a lot of posturing and no real action. As a result, MBS have just traded sideways, right in the middle of the new and lower trading channel…a pretty boring session actually with zero economic data with the gravitas to move the needle.
Domestic Flavor
Empire Manufacturing: This Fed district’s regional report showed that manufacturing in NY hit its lowest level in 5 months, but still was in positive territory. This is a lower-tier report and has no impact on the market.
On Deck for Tomorrow: NAHB Index, TIC.