Learn from the Past
Mortgage backed securities (MBS) gained just 2 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways and remained at their lowest levels of the year.
There was a mixed-bag of economic data with low inflation and weak manufacturing but strong GDP, Personal Income and Spending and Consumer Sentiment. But the bond market was “on pause” as it awaited any progress in the U.S./China trade negotiations. These were expected to get back on track during the G20 meeting. They did actually get back on track but that announcement was not made until after the markets were closed for the weekend.
Inflation Nation: The May Personal Consumption Expenditures (PCE), the Fed’s key measure of inflation, remained well below their target rate of 2% and matched market expectations. The Headline PCE YOY hit 1.5% vs. estimates of 1.5% and the Core (ex food and energy) YOY reading came in at 1.6% vs. estimates of 1.6%.
Income and Spending: There was a nice spike in Personal Income in May, up 0.5% vs. estimates of 0.3% on a MOM basis. Personal Spending increased by 0.4% on a MOM basis which matched market expectations but the prior month saw a very nice revision upward from 0.3% to 0.6%.
Manufacturing: The bellwether Chicago PMI showed its first contraction in 2.5 years. Any reading below 50 is contractionary, the market was expecting a reading of 53.1, so this was a surprise to the downside. This report is a mixed bag though as prices, employment and inventories rose at very expansionary rates. The culprit was new orders which tanked and dragged down the overall reading.
Consumer Sentiment: The final June University of Michigan’s Consumer Sentiment Index was revised from the preliminary reading of 97.9 to 98.2; the market was expecting 98.0.
GDP: The FINAL revision to the 1st quarter GDP came in at 3.1% which is what it was after the first revision and it is what the market expected. This was originally released at 3.2% but has been stuck at 3.1% after revisions.
Durable Goods Orders: At first glance, the Headline May data (subject to revision) was much weaker than expected (-1.3% vs. estimates of -0.1%). However, the Headline data is overweighted with big ticket items. For example, just a couple of plane orders can swing that number in a big way. So, when you strip out the very volatile Transportation Sector, the Core reading was stronger than expected (0.3% vs. estimates of 0.1%). Non-Defense Capital Goods Orders ex-Aircraft great at 0.4% vs. estimates of 0.1%.
What’s on the Agenda for this Week?
This is a holiday-shortened week with an early close to the bond market on Wednesday. Thursday is of course closed for our nation’s Independence Day. When the bond market reopens on Friday, the June Jobs report will be issued. Most trading operations will not be up to full staff on Friday as many will enjoy a long weekend. But Friday’s Average Earnings data is the most important data set of the week. Not much has really changed after the G20 meeting as evidenced by pricing this morning. The bond market won’t really move until an actual deal is done and that could be something that still takes a while and lest we forget, these negotiations imploded before. Look for MBS to enjoy another week in the sun as they will likely remain in the same trading channel as last week which means they will continue to enjoy the lowest rates of the year, but actual gains in back end pricing over and above the 102.34 level is not very realistic.
The three key areas that have the greatest ability to impact backend pricing this week are: (1) Geo-Political, (2) Trade War and (3) Jobs.
(1) Geopolitical: Now that President Trump has made a historical physical visit to North Korea, negotiations there are back in focus but markets will give the most attention to European Union meetings and the potential disciplinary action against Italy. Tuesday’s OPEC meeting will be important as well as rising escalation with protestors in Hong Kong, Iran and Syria/Israel.
(2) Trade War: The temporary “truce” with China over the weekend will stave off the next round of $300B in tariffs on consumer staples which was largely expected. Now the real work begins and any real movement towards the toughest issues will get a lot of attention.
(3) Jobs: There is a lot of jobs and income related data this week that will culminate in Friday’s Jobs Report. The bond market will give the most weight to the YOY Average Hourly Earnings report which is expected to tick up from 3.1% to 3.2%. But the headlines will go to the Non-Farm Payrolls data that is expected to move back towards trend in the 150K to 160K range. It will also be interesting to see what type of revision is made to May’s NFP reading of 75K.
The Talking Fed
Here is this week’s schedule:
07/01 Richard Clarida
07/02 John Williams, Loretta Mester
07/05 Fed’s Balance Sheet
Manufacturing: Manufacturing on a national level is alive and well. Unlike several recent regional manufacturing surveys (Chicago PMI, Empire Manufacturing, Philly Fed, etc.), the ISM Manufacturing report still shows expansion with a 51.7 vs. a 51.0 estimate.
Construction Spending: The May reading was a miss with a -0.8% vs. +0.1% estimate. However, April was revised higher from 0.0% to 0.0%.
Across the Pond
China: Caixin Manufacturing PMI 49.4 vs. estimates of 50.0.
Japan: Nikkei Manufacturing PMI 49.3 vs. estimates of 49.5.
Germany: Unemployment Rate 5% vs. estimates of 5%/Markit Mfg PMI 45.0 vs. estimates of 45.4.
Eurozone: Unemployment Rate 7.5% vs. estimates of 7.6%.
On Deck for Tomorrow
There are no domestic economic releases. We will hear from Talking Feds John Williams and Loretta Mester, and the Bank of England’s Governor Mark Carney. There will also be the Reserve Bank of Australia’s interest rate decision and OPEC+.