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 compared to the previous week, keeping the lowest rates of 2019 alive and well.
Mortgage rates remained at or near their lowest levels of 2019 as concerns over multiple failed votes on Brexit continued to keep money pouring into the safe-haven of U.S. bonds. That added demand for our debt pushes rates lower. There was very tame inflationary data for Personal Consumption Expenditures (PCE) but very strong manufacturing, GDP and consumer sentiment which would normally be a factor in pushing rates higher.
Inflation Nation: The Fed’s Key measure of inflation, PCE YOY (Year-over-Year) Core (Ex-Food and Energy) was lighter than expected, coming in at 1.8% vs. estimates of 1.9%. However, the prior month was revised upward from 1.9% to 2.0%, so really it was a match. The Headline PCE YOY matched expectations with a 1.4% increase and the prior month moved up from 1.7% to 1.8%. There was a big miss on Personal Spending which showed MOM increase of only 0.1% vs. estimates of 0.3% and Personal Income hit 0.2% vs. estimates of 0.3%
Manufacturing: The March reading for the bellwether Chicago PMI was lighter than expected (58.7 vs. estimates of 61.0). However, ANY reading above 55 is VERY robust growth.
Consumer Sentiment: The final reading of the University of Michigan’s Consumer Sentiment Index for March was revised upward from 97.8 to 98.4 which is the strongest reading since October.
Taking it to the House: New Home Sales MOM hit 667K vs. estimates of 620K. Plus, January was revised upward from 607K to 636K. February Pending Home Sales were down -1.0% vs. estimates of 0.7%. Weekly Mortgage Applications jumped up by 8.9%. Refinances increased by 12% and Purchases increased by 6.0%. February New Housing Starts were lighter than expected (1.162M vs. estimates of 1.213M) but January was revised upward from 1.230M to 1.237M. Building Permits were close to the mark with a 1.296M vs. estimates of 1.300M reading. The January Case-Shiller 20 Metro City Home Price Index showed a YOY gain 3.6% of vs. estimates of 4.0%. The more comprehensive FHFA Home Price Index showed a MOM gain 0.6% of vs. estimates of 0.3%.
GDP: The final revision to the 4th quarter GDP was revised lower from 2.6% to 2.2%; however, 2.2% is exactly what the market was expecting. As the BEA notes, measured from the 4th quarter of 2017 to the 4th quarter of 2018, real GDP increased 3.0% during the period. That compared with to an increase of 2.5% during 2017.
What’s on the Agenda for this Week?
The week starts off with another round of very strong U.S. economic data (ISM Manufacturing and ISM prices paid…market is ignoring Retail Sales) which is putting some pressure on pricing. This week will once again be very reactive to any actual movement on the Brexit and Trade fronts. As far as Big Jobs Friday, if YOY Wages break above 3.4%, MBS will sell off but If then drop below 3.0%, MBS will rally. Pricing is expected to remain at very elevated levels but it looks like there is strong potential to move from the channel of the last two weeks back into a slightly lower channel that as was three weeks ago.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Brexit, (2) Trade Snore and (3) Jobs.
(1) Brexit: The European Union has scheduled an “emergency” Brexit meeting for April 10 as Great Britain has failed to pass anything by the March 31st deadline. While Great Britain has voted to extend the deadline, that deadline cannot be unilaterally extended. Meanwhile, British Prime Minister Theresa May is attempting to hold yet another “indicative” vote on Tuesday and the House of Commons is looking to plan another round of votes on Monday.
(2) Trade Snore: Fresh off of last week’s meetings in China, Chinese Vice Premier Liu He will be visiting Washington on Wednesday for further discussions. Also, on the USMCA front, the deal that was reached with Mexico and Canada is still not final as it has not passed through our Congress. Canada is balking at some tariffs that are still in place (and were not part of the deal) and Mexico is concerned that the U.S. is going to completely close down the U.S.-Mexico border as a series of “caravans” with thousands of people are attempting to violate our borders without legal process.
(3) Jobs: There are actually several key domestic economic reports this week which include ISM Manufacturing and ISM Services, the latter representing 2/3 of our economy. But the lion’s-share of attention will be on Friday’s big jobs data dump. As far as Non-Farm Payrolls, it depends on just how much last month’s reading of 20K will be revised. But MBS will react the most to the Average Hourly Earnings on a Year-over-Year basis. It is expected to remain at the very lofty level of 3.4%.
MBS moved lower today on stronger Chinese manufacturing data as well as a very strong U.S. ISM Manufacturing and Prices Paid report.
Retail Sales: This report has been all over the place over the past four months and most economists and bond traders are not giving it the weight that it once enjoyed. The February data appears to be much worse than expected with the headline reading at -0.2% vs. estimates of +0.3%. However, the miss is because January was revised upward from 0.2% to 0.7%. Same goes for Retail Sales Ex-Autos (-0.4% vs. estimates of +0.4%) as January was revised upward significantly from 0.9% to 1.4%.
Manufacturing: The March ISM Manufacturing report was stronger than expected (55.3 vs. estimates of 54.2). This is also much stronger than February’s reading of 54.2 demonstrating that there is an upward, not downward trajectory of manufacturing in the U.S. Prices Paid were also higher (inflationary) than expected with a 54.3 vs. estimates of 52.5 reading.
Construction Spending: The February data was almost three times higher than expectations (1.0% vs. estimates of 0.4%) and January was revised upward from 1.3% to 2.5%. Ending for the bellwether Chicago PMI was lighter than expected (58.7 vs. estimates of 61.0). ANY reading above 55 is VERY robust growth. However, Residential Spending dropped by 11.7%. All the gains were in public works and commercial.
Across the Pond
China: Caixin Manufacturing PMI 50.8 vs. estimates of 48.9.
Eurozone: Unemployment Rate 7.8% vs. estimates of 7.8%.
On Deck for Tomorrow
Durable Goods Orders and a potential Brexit vote.