Learn from the Past
Mortgage backed securities (MBS) gained 27 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move downward to their lowest levels of the year. It was a very volatile week with a net difference of 80 basis points from the intra-day highs to intra-day lows.
Last week was all about the major Central Banks and the prospect for low inflation and lower cost of funds. Four out of the top six world economies’ Central Banks all had a similar theme: They are all worried about stubbornly low inflation and the overhang of a prolonged trade war. This caused global long bonds to rally which in turn, caused mortgage rates to decrease.
Central Bank Palooza
The Talking Fed: The much awaited FOMC (in)action finally hit on Wednesday.You can read their official Policy Statement here.
Here are some key takeaways from them:
- Kept their Key Interest Rate at 2.25% to 2.50%.
- The removed the term “patient” from their policy statement.
- One Voting Fed Member voted against their policy which means either they wanted to lower or increase rates and not keep them the same.
- The Dot-Plot chart showed that 8 FOMC members are forecasting for at least one rate cut in 2019, 8 members showed NO rate changes in 2019 and One person showed One rate hike.
- Fed Chair Powell stressed in his live remarks that the Dot Plot chart is not the official Fed forecast for rates.
- The FOMC says it will “act as appropriate to sustain the expansion” and “closely monitor” incoming information, language that echoes Powell’s recent speech but is new to the statement.
- No recession! The Fed is forecasting positive GDP growth at least through 2021
• 2019 median GDP growth 2.1% vs. 2.1%
• 2020 median GDP growth 2.0% vs. 1.9%
• 2021 median GDP growth 1.8% vs. 1.8%
- No threat of inflation! Fed shows that they do not expect to break above their 2% target rate for some time.
• 2019 median core PCE inflation 1.8% vs. 2.0%
• 2020 median core PCE inflation 1.9% vs. 2.0%
• 2021 median core PCE inflation 2.0% vs. 2.0%
• Fed Chair Powell confirmed that he would serve out his full four year term despite any political pressure.
European Central Bank: Super Mario to the rescue. ECB President Mario Draghi did all but promise a wave of helicopters dropping cash into the masses today. He said that if the outlook doesn’t improve and inflation doesn’t strengthen, “additional stimulus will be required” adding that the ECB can amend its forward guidance, that rate cuts remain “part of our tools” and asset purchases are also an option. In short, a full dovish capitulation by the ECB chief.
Japan: The Bank of Japan kept their key interest rate unchanged at -0.1% (vote 7 to 2). The BofJ said “Downside risks concerning overseas economies are likely to be significant, and it is also necessary to pay close attention to their impact on firms’ and households’ sentiment in Japan.”
Great Britain: The Bank of England kept their key interest rate at 0.75% (vote 9 to 0). The BofE said that UK economic growth has “weakened slightly in the first half of the year” and “downside risks to growth have increased.” and “Globally, trade tensions have intensified, domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads, as well as falls in industrial metals prices. Forward interest rates in major economies have fallen materially further.”
What’s on the Agenda for this Week?
The economic data this week will not have much (if any) impact on pricing. Look for MBS to remain at very elevated levels but they aren’t expected to near Thursday’s intra-day highs.
The three areas that have the biggest ability to impact backend pricing this week are: (1) Trade War, (2) Geopolitical and (3) The Talking Fed.
(1) Trade War: The G20 Summit in Osaka, Japan will start on Friday and continue through the weekend. Leading up to that event, confirmation of scheduled meetings (number and length) between Trump and Xi as well as information about exactly what will and will not be discussed will have a big impact on markets.
(2) The Talking Fed: This is a big week for speeches including one from Fed Chair Jerome Powell. This is the Fed’s chance to steer the markets if they feel that market sentiment about the Fed’s path after last week’s FOMC inaction is misguided. Here is the schedule:
• 06/24 Dallas Fed Mfg, Chicago Fed Mfg
• 06/25 Powell, Bostic, Williams and Bollard (the lone NO vote last week)
• 06/27 Fed’s Balance Sheet
(3) Geopolitical: There is a lot for markets to focus on this week. Iran-U.S. is heating up as President Trump says that even more sanctions are set to go into effect today. The Eurozone is still a basket of instability as the EU and Italy fighting over a budget and Brexit continues to be the soap opera that keeps on giving with wild news/tabloid stories on PM front-runner Borris.
Treasury Auctions this Week
• 06/25 2 year note
• 06/26 5 year note
• 06/27 7 year note
The Talking Fed:
The May Chicago Fed National Activity Index was better (less worse) than expected with a -0.5 reading vs. expectations of -0.18. This is actually a nice rebound from the prior month’s reading of -0.48. The regional Dallas Fed Manufacturing Survey saw a nice increase in production from May’s level of 6.3 to June’s level of 8.9. The General Activity Index was weaker than expected though with a -12.1 vs. estimates of -1.0 reading.
Speaking of Dallas, Dallas Fed President Robert Kaplan said, “I believe it would be wise to take additional time and allow events to unfold as we consider whether it is appropriate to make changes to the stance of U.S. monetary policy.”
The United States started more sanctions against Iran, this time on their “Supreme Leader” and other leaders.
Across the Pond
Japan: Leading Economic Index was 95.9 vs. estimates of 95.5. The Bank of Japan meeting Minutes are being released today.
On Deck for Tomorrow
Powell, 2 year Treasury Note Auction, Case Shiller, FHFA Home Price Index, New Home Sales, Consumer Confidence and Richmond Fed.