Learn from the Past
Mortgage backed securities (MBS) gained 29 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the previous week.
MBS were pressured lower and trading right along the bottom support level until Friday’s GDP report. And it was a very interesting take on the GDP data by the markets. First, MBS moved lower (higher rates) on the massive headline beat of 3.2%. However, once the market read through and digested the report, it became clearer that a good chunk of the beat was due to inventory buildup, which may (or may not) have been due to front running higher tariffs. The internal prices paid was also about half of market expectations. Together, these two combined to cause trades to reverse course and back into positive territory (lower rates).
GDP: A huge beat with the release of the preliminary (will be revised several times) 1st quarter GDP of 3.2% vs. estimates of 2.1%. Those estimates were 0.4% a month ago and 1.9% a week ago. This is one of the hottest 1st quarters in recent history. However, inflation remained at bay with GDP Prices up only 0.6% for the quarter which was half of the market expectations of 1.3%.
Consumer Sentiment: The preliminary April reading hit 97.2 vs. estimates of 97.0.
Durable Goods: The Preliminary March data was three times as high as expected with the headline reading coming in at 2.7% vs. estimates of 0.8%. When you strip out Transportation it was double the expectations, 0.4% vs. estimates. of 0.2%. The big focal point of traders is the Non-Defense/Ex Aircraft which jumped by 1.3% vs. expectations of only 0.1%.
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.
What’s on the Agenda for this Week?
This is a very pivotal week with at least one major economic release each and every day that has the gravitas to move backend pricing, so this is not a week to “set it and forget it”. For today, look for a very small pullback from Friday’s highs on a purely technical basis. For the week, it will take a very dovish Fed AND a breakdown in the China trade talks for MBS to actually move a channel higher.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bank Palooza, (2) Trade Snore and (3) Jobs.
(1) Central Bank Palooza: Key interest rate decisions and policy statements will be issued from two of the top five economies this week starting with our own Federal Reserve on Wednesday and then the Bank of England on Thursday. Based upon the recent Beige Book, there would appear to be nothing out there that would cause the Fed to take action at this meeting. The markets will be very sensitive to the live press conference afterwards though.
(2) Trade Snore: The U.S./China Trade War (snore) will wake up once again take center stage as meetings resume in China Tuesday. US Trade Representative Lighthizer and Treasury Secretary Mnuchin will be in Beijing to continue with another round of trade talks. The latest suggestion was that both sides were working to reach a draft agreement for some time in May with talks next week covering “trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases and enforcement”. Chinese Vice Premier Liu He is then expected to travel to the White House May 8th.
(3) Jobs: There will be a ton of income and jobs related data all week culminating in Big Jobs Friday. The focus will be on the Average Hourly Earnings YOY which is projected to jump from 3.0% up to 3.4%. If that is the case, then the week will end on a down note for pricing. But if it remains at the 3.0% or below, then pricing will remain solid.
MBS moved lower from the ceiling of resistance. The market largely ignored the PCE report and had a slight technical pullback as was expected.
PCE: Both the February and March readings were issued for Personal Consumption Expenditures, the Fed’s key measure of inflation. The March YOY Headline reading hit 1.5% vs. estimates of 1.7%. The Core (ex food and energy) hit 1.6% vs. estimates of 1.7%. Personal Income MOM grew at 0.1% vs. estimates of 0.4%. Personal Spending MOM was higher than expected 0.9% vs. estimates of 0.7% and it was a big MOM improvement over Feb’s pace of 0.1%.
On Deck for Tomorrow: The FOMC begins two days of meetings, U.S. Trade representatives head to China, Chicago PMI, Consumer Confidence, Pending Home Sales and the Employment Cost Index.