Learn from the Past
Mortgage backed securities (MBS) gained 13 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at very low levels.
There was another round of “solid” domestic economic data with good readings in manufacturing and services. The Fed’s Beige Book was actually a smidge more upbeat than the last one. But there was a big miss in Friday’s Non Farm Payroll data although the Unemployment Rate remained near an all-time historical low with another reading of 3.6%. The driving factor in global interest rates was not economic data though, it was geo-political. British Prime Minister Theresa May stepped down on Friday and the markets continued to be concerned over a lengthy trade battle with China as well as looming tariffs with Mexico. This uncertainty caused a continued desire to park money into long bonds, which continues to push mortgage rates far below where they otherwise would be.
Jobs: It’s Big Jobs Friday!
Here is the tale of the tape:
May Non Farm Payrolls 75K vs. estimates of 185K
April Non Farm Payrolls revised downward from 263K to 224K
March Non Farm Payrolls revised downward from 189K to 153K
After revisions, the three month rolling average is now 151K.
The Average Hourly Rate moved up 6 cents to $27.83 per hour.
Average Hourly Earnings increased by 0.2% on a MOM basis vs. estimates of 0.3%
Average Hourly Earnings increased by 3.1% on a YOY basis vs. estimates of 3.2%
The Unemployment Rate remained at 3.6% which matched forecasts.
The Participation Rate remained at 62.8%
ISM Services: The May reading was very robust, coming in at 56.9 vs. est. of 55.4. Any reading above 50.0 is expansionary and readings in the upper 50’s are very strong.
The Talking Fed
Their latest Beige Book was issued that is prepared in advance of their next FOMC Meeting this June.
Here are some key takeaways:
• A slight upgrade as the last Beige Book assessment was “slight to moderate” economic growth. This time around it is depicted as “modest pace overall”, dropping the “slight” classifier.
• Tariffs are a major concern to businesses but overall, higher input prices increased at a modest pace in most districts.
• The word “slow” (or variant thereof) dropped from 38 times in the last report to only 26 in this report.
• Most districts saw modest or moderate growth in jobs and wages, though regions including Richmond and San Francisco cited difficulties finding workers or highlighted tight conditions. Wage pressures remained “relatively subdued” with some employers boosting benefits, contrary to widespread reports of continued labor shortages.
• Farms reported struggles across the U.S. In the Minneapolis district, a wet spring threatens the planting season, with some growers saying they might not be able to plant at all this year. Anecdotes from Chicago echoed these troubles, with farmers challenged by poor weather and low crop prices. 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?
This is a very busy week with a lot of domestic and foreign economic data to digest but it will be geo-political “news” that will once again drive pricing this week. Look for last week’s channel to once again hold but look for a technical pull back of -3 to -15 when the smoke clears.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political/Trade, (2) Domestic Flavor and (3) Across the Pond
(1) Geopolitical: Lots to focus on this week. British PM May is gone and later this week we might know who her replacement will be and/or have another round of elections…the results of which will determine how (and if) Great Britain actually leaves the EU and in what form. Trade continues to be front and center. While the Mexican Immigration punitive tariffs have been put on hold, they are not gone. Mexico has pushed hard to meet the U.S. demands but if they fizzle out in their border enforcements, then those tariffs will be back. On the Chinese front, there is much speculation on if Trump will meet with Xi at the upcoming G20 meeting. Meanwhile both sides continue to ramp things up with another round of a new $300B in tariffs hitting next week.
(2) Domestic Flavor: The biggest reports of the week will be Wednesday’s YOY Consumer Price Index Ex-food and energy which has been hovering around 2.1%. Any increase in that level would be negative for MBS pricing and it will be interesting to see if there is any upward pressure due to tariffs which we have not seen yet. Friday’s Retail Sales will also be watched very closely.
(3) Across the Pond: There are some very key releases this week which have the gravitas to move pricing:
China: Trade Balance, PPI, CPI, Retail Sales, Industrial Production and a NBS Press Conference
Japan: Industrial Production
Germany: CPI, Wholesale Prices
Great Britain: GDP, Unemployment Rate
Eurozone: ECB President Draghi speech
Treasury Auctions this Week
06/10 3 year note
06/11 10 year note
06/12 30 year bond
Jobs: Another monster JOLTS report. The April Job Openings and Labor Turnover Survey (JOTLS) showed a massive 7.449 million unfilled positions which is the third best reading in history. This makes the 14th month in a row where there are more job openings than there are people looking for work (unemployed).
On Deck for Tomorrow: Small Business Optimism, PPI, Economic Optimism and the 3 year note.
Across the Pond
China: Their Trade Balance actually improved from $13.83B to $41.65B.
Great Britain: Industrial Production -2.7% vs. estimates of 0.1%. GDP MOM April -0.4% vs. estimates of 0.0%.