Learn from the Past
Mortgage backed securities (MBS) gained 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways (unchanged) compared to the previous week.
There was a lot of housing news and it all pointed to a very healthy housing market but the markets focused more on the Federal Reserve and the release of their Minutes from their last FOMC meeting. Overall, the Minutes really supported a “middle of the road” bias by the Fed which matched their prior statement.
Taking it to the House
• Weekly Mortgage Applications rose by 2.4%, led by a nice jump of +8.0% in Refinance Applications. Purchases dropped by -2.0%.
• April New Home Sales hit 673K vs. expectations of 675K which would appear to be a miss. But in fact, this was A VERY STRONG HOUSING REPORT. This is due to the fact that March was revised upward to 723K which was the highest reading since October 2007! And April was the third best reading since 2007.
• Median prices jumped to $342,200 with the average sales price at $393,700.
• The April Existing Home Sales Report showed an annualized pace of 5.19 million units which is just off of March’s pace of 5.21M. The market was expecting a little better reading of 5.35M.
• Sales of single-family homes, the key component in this report, now has a 3-month average that is positive, at 4.733 million for the best showing since August last year.
• Inventory moved up from 3.8 months in March to 4.2 months in April which is still extremely tight.
• Median home prices rose yet again, this time by 2.9% to $267,300.
The Talking Fed
The Minutes from the last FOMC meeting were issued and they were not as “dovish” as traders were hoping for. You can read the official release here.
Here are some key points:
• Many participants viewed the recent dip in PCE inflation as likely to be transitory. Survey-based measures of longer-run inflation expectations were little changed.
• A number of participants observed that some of the risks and uncertainties that had surrounded their outlooks earlier in the year had moderated, including those related to the global economic outlook, Brexit, and trade negotiations.
• Members observed that a patient approach to determining future adjustments to the target range for the federal funds rate would likely remain appropriate for some time, especially in an environment of moderate economic growth and muted inflation pressures, even if global economic and financial conditions continued to improve.
• The Committee noted that it is prepared to adjust the size and composition of the balance sheet to achieve its macroeconomic objectives
• With regard to the post-meeting statement, members agreed to remove references to a slowing in the pace of economic growth and little-changed payroll employment, consistent with stronger incoming information on these indicators.
What’s on the Agenda for this Week?
Look for MBS to continue to see very elevated and fantastic pricing mainly due to geopolitical uncertainty.
Domestically, we really don’t get any data that can impact pricing until Friday’s PCE report (the Fed’s key inflation measure). We do get a revision to the 1st quarter GDP on Thursday but it’s tired, old data at this point.
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Geopolitical, (2) Trade War and (3) Across the Pond.
(1) Geopolitical: Great Britain’s Prime Minister Theresa May is toast and the race is on to see who will replace her. The top three candidates are all pro-Brexit even if it means a “hard” Brexit. In France, they too could be losing their leader as current President Emmanuel Macron’s party lost its majority in their Parliament to Marine Le Pen’s National Rally party. Depending on her party’s majority combining with the other party’s, it could mean a new leader in France. Italy and the EU are clashing over Italy’s budget short fall and Turkey has invaded Northern Iraq.
(2) Trade War: The China/U.S. tensions continue to escalate with Huawei, rare-earth exports and threats of dumping U.S. debt (Treasuries). Meanwhile, President Trump (speaking in Japan) said he hopes for a deal but that in the meantime, more tariffs could be on the way.
(3) Across the Pond: Overseas, some very important economic news will be hitting every day.
Treasury Auctions this Week
05/28 5 year note
05/29 2 year note, 7 year note
Today showed VERY strong Consumer Confidence, one of the best readings in almost 2 decades. Normally, that would have pressured pricing but the big offset is the continued uncertainty over Brexit and Europe in general as well as the big question mark that is the Trade War with China. This high level of uncertainty continues to provide tremendous support for pricing. But MBS cannot go higher as that upper resistance level is very strong.
Taking it to the House: Two data-points on housing appreciation were reported today. The FHFA House Price Index (every single Fannie, Freddie, FHA and VA loan for a home purchase) showed that the values of homes based upon recent loan closings through their system grew at a 0.1% pace on a Monthly basis and 5.0% on a yearly basis in March. The March Case-Shiller Home Price Index, which only covers 20 metro cities, showed a yearly increase of 2.7% vs. estimates of 2.5%
Consumer Confidence: The May Consumer Confidence report is a great reading, jumping to 134.1 which beat out estimates of 129.9 and hit the highest level since 2000.
Treasury Dump: There were two auctions today, the 2 year and 5 year. Focusing on the longer of the two, the 5 year was middle of the road. $41B went off at a high yield of only 2.065% which is the lowest at auction since 2017. So, in that sense it was good. But demand was weaker than recent norms with a bid-to-cover ratio of only 2.38. But Direct, non-dealers gobbled up 76% which is very positive.
Across the Pond
Germany: Import Prices YOY 1.4% vs. estimates of 1.6%.