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 lower compared to the previous week.
The holiday-shortened session for Memorial Day that saw MBS trading in a tight range until Friday. Almost all of the gains occurred on Friday and were the result of a flight to safety by international investors amid growing concerns of several geo-political storms as well as rising concern over trade.
Inflation Nation: The Fed’s mostly closely watched measure of inflation, Personal Consumption Expenditures, was a little hotter than expected on a monthly basis, but the markets focus more on the YOY number which matched expectations and remains well below 2%. Headline PCE YOY hit 1.5% vs. estimates of 1.5% and Core PCE hit 1.6% vs. estimates of 1.6%.
Personal Income: The April Personal Income reading was stronger than expected (0.5% vs. estimates of 0.3%) and a big improvement over March’s pace of only 0.1%. Spending was stronger as well with a MOM gain of 0.3% vs. estimates of 0.2%.
Manufacturing: The May Chicago PMI was very robust with a 54.2 vs. 53.7 reading. Any reading above 50 is expansionary.
Consumer Sentiment: The preliminary May reading was revised from 102.4 to the final May reading of 100.0, still a nice number.
Consumer Confidence: This is a great reading. The May Consumer Confidence report jumped to a reading of 134.1 which beat out estimates of 129.9 and hit the highest level since 2000.
GDP: The first revision to the previously released 1st quarter GDP was revised downward from 3.2% to 3.1%. The market was expecting 3.0% to 3.1% range. If anything, this reaffirms that our 1st quarter grew at a “three handle” which means that the original print was not a mistake. Consumer Spending was revised upward from 1.2% to 1.3%.
Taking it to the House: The April Pending Home Sales report showed a MOM drop of -1.5% vs. expectations for a small gain of +0.9%. March was revised upward though from 3.8% to 3.9%. The Midwest was the only region that saw significant gains, perhaps due to the larger impact of SALT on states on the coasts. The report showed a MOM drop of -1.5% vs. expectations for a small gain of +0.9%. March was revised upward though from 3.8% to 3.9%.
There were two data-points on housing appreciation last week. The FHFA Home 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%
President Trump announced that he may hit Mexico with 5% in tariffs. This is not the result of the new trade agreement that Canada, US and Mexico have all agreed to. This is a tariff that is designed to get Mexico to stem the flow of illegals crossing their borders onto U.S. soil. This 5% tariff will go into effect on June 10 and then duties of up to 25% will go into effect if Mexico ignores the 5% tariff volley and does not take action to “reduce or eliminate the number of illegal aliens”.
On the Chinese front, China is said to be preparing their rare-earth mineral procedure for slowing down or stopping exports to the U.S. Also, they are looking into adding U.S. companies and individuals to a list that China will not allow business/trade with.
What’s on the Agenda for this Week?
Look for MBS to remain in the new channel this week as it is unlikely that there will be a reduction in geo-political/trade fear which is the driving factor in pricing right now. For an intra-day basis look for a range of +12 to -9 which is actually a little more volatile/wider range than it has been.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) Central Bank Palooza and (3) Domestic Flavor.
(1) Geopolitical: There is a lot going on in the world. With Brexit front and center, British Prime Minister Theresa May will step down on Friday and the markets are very focused on who her replacement will be as it will impact their odds of a “hard Brexit” vs. a “soft Brexit”. The new round of Chinese Tariffs goes into effect on Tuesday. China’s Xi Jinping makes a two-day state visit to Russia while President Trump meets Ireland PM Varadkar and current British PM May. On our shores, Kevin Hassett (head of the White House Council of Economic Advisors) has resigned and leaves office Monday.
(2) Central Bank Palooza: The Reserve Bank of Australia meets this week and is widely expected to actually be the first major central bank to announce a rate CUT from 1.5% down to 1.25%. But the main focus of the markets will be the European Central Bank meeting and policy statement followed by a live press conference with ECB President Mario Draghi. Our own Fed will release their Fed Beige Book which is prepared specifically in advance of the next FOMC meeting. Fed Chair Powell will make opening remarks at the “Monetary Policy Strategy, Tools, and Communications Practices” on Tuesday and Wednesday.
(3) Domestic Flavor: This is a big week for domestic economic data with big-name reports like ISM Manufacturing and Services, but Friday’s Jobs deluge will get the most attention. The bond market will pay the most attention to the Average Hourly Earnings YOY reading which is expected to remain at a 3.2% pace. Anything higher than that will be negative for pricing but anything below 3.0% would be positive for pricing.
Continued concern over trade escalations with China, Mexico, the EU, and now India, kept MBS at elevated levels. Today’s global economic data (U.S., China and Japan) was actually pretty solid for a change.
Manufacturing: The May ISM Manufacturing PMI was just below market expectations (52.1 vs. estimates of 53.0) but ISM Prices Paid were higher than expectations (53.2 vs. estimates of 52.0). Overall, it was a solid report with gains in production, new orders and employment.
Construction Spending: At first glance, the April report was lighter than expected (0.0% vs. estimates of 0.4%); however, the miss was due to a massive upper revision in March from -0.9% all the way up to a final reading of +0.1%.
Add India to the list. President Trump said India would be removed from the U.S.’s privileged-trading program called the Generalized System of Preferences by Wednesday. Under the decades long program meant for some developing economies, the U.S. had allowed India to avoid tariffs on certain exports to the U.S. in the interest of promoting tighter trade ties and development.
India, the U.S.’s ninth-largest trading partner, is a top beneficiary of the GSP program. Trump’s move will add tariffs of as much as 7% on Indian exports of goods like chemicals, auto parts and tableware to the U.S., which in 2018 accounted for more than 11%, or $6.3 billion, of India’s total exports of goods valued at $54.4 billion, according to the Congressional Research Service, a research agency for the U.S. Congress.
Across the Pond
China: Caixin Manufacturing PMI 50.2 vs. estimates of 50.0.
Japan: Nikkei Manufacturing PMI 49.8 vs. estimates of 49.6.
On Deck for Tomorrow
Factory Orders, Fed Chair Powell, Eurozone: Unemployment Rate, CPI.