Learn from the Past
Overview
Mortgage backed securities (MBS) lost just 5 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
It was a holiday shortened week with the bond market closing at 2:00 Eastern on Thursday. There was some fairly good economic data with strong Retail Sales and yet another strong jobs report. The Fed’s Beige Book received the most attention but it really offered no surprises.
The Talking Fed
The latest Beige book was prepared by the Fed in advance of their next policy meeting.
Here are some key highlights:
– Labor: Employment continued to increase nationwide, with nine districts reporting modest or moderate growth even as the other three reported slight growth. Furthermore, a majority of districts cited shortages of skilled laborers, most commonly in manufacturing and construction, while wages for both skilled and unskilled positions generally grew at about the same pace as earlier this year.
– Manufacturing: Contacts in many districts reported that trade-related uncertainty was weighing on activity.
– Inflation: On balance, prices have risen modestly since the previous report. Input costs increased in the modest-to-moderate range. Tariffs, freight costs, and rising wages were often cited as key factors driving this trend.
– Economic Activity: Similar to the last report, most First District business contacts cited modest to moderate growth, with some slowing in manufacturing.
– Retail Spending: All retail contacts for this round, covering late February through early April, reported that same-store sales grew by low- to mid-single digits on a year-over-year basis, indicating that “consumers were in a buying mood.”
Domestic Flavor
Retail Sales: The March data was much stronger than expected. The headline reading hit 1.6% vs. estimates of 0.9%. Ex-Autos, another beat with a 1.2% vs. 0.7% expectation. Plus February was revised upward from -0.4% to -0.2%.
Jobs: For the second straight week, there was a sub-200K reading in Initial Weekly Jobless Claims (192K vs. estimates of 205K). The more closely watched 4 week moving average dropped down to 201,250 with is the lowest since 1969.
Philly Fed: Their Business Outlook Survey for April was a little lighter than expected but still in positive territory (8.5 vs. estimates of 10.2).
Business Inventories: The February data was better than expected (lower number is better) 0.3% vs. estimates of 0.4%.
Leading Indicators: The March Leading Economic Indicators were a little better than expected (0.4% vs. estimates of 0.3%
What’s on the Agenda for this Week?
Overview
It will just take a little nudge from rising oil prices, a strong GDP report or an official announcement on a trade summit and MBS will crash below last week’s support level for worse pricing. However, barring those events from happening, MBS will once again skim along in the well defined trading channel.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) GDP, (2) Geo Political and (3) Central Bank Palooza
(1) GDP: The first look at the 1st quarter GDP will be this week. Around a month ago, market expectations were for a growth rate of only 0.4% but now that has boomeranged into 1.8% to 1.9%. Any reading above 2.0% would be negative for pricing.
(2) Geopolitical: No Waivers for You! For the past six months, the United States has let 10 nations know that their waivers (exemptions from having to abide by the trade embargo against Iranian oil exports) would expire. Three of those nations have already stopped purchasing ahead of the deadline but five of them, including China and India, have still been purchasing until now. This is not new policy at all and well telegraphed to everyone, but as usual, everyone rides it until the last possible minute. Markets will be sensitive to rising oil prices and any heightened military prospects.
The U.K. Parliament is now back from Easter Break and we will start to get some more Brexit headlines after about 10 days of quiet on that front.
(3) Central Bank Palooza: This week, the Bank of Japan’s (third largest economy) will issue their interest rate decision and policy statement as well as the Bank of Canada (tenth largest economy).
Treasury Auctions this Week
04/23 2 year note
04/24 5 year note
04/25 7 year note
Market Wrap-up
Overview
It was a very light open to what could be a volatile week. As expected, MBS were under pressure today and have once again tested the support level at the 50 day moving average. No significant economic releases hit today as overseas the markets were closed for Easter Monday and domestically, there was only housing news which does not impact pricing.
Domestic Flavor
Taking it to the House: Existing Home Sales for March were a little lower than expected (5.21M vs. estimates of 5.30M) on an annualized basis. But is that a miss? Or are the “estimates” wrong to begin with? Regardless, time on the market fell, and the median sales price hit a new all-time high for March. In fact the median sales price YOY has now risen for 85 straight months.
On Deck for Tomorrow
New Home Sales, Richmond Fed Manufacturing and a 2 year Treasury note