Learn from the Past
Mortgage backed securities (MBS) gained just 8 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways but remained at their lowest levels of the year.
It was a holiday-shortened week with really only three full trading sessions. MBS remained at elevated levels but saw a significant pull back from their weekly highs due to a very strong jobs report on Friday.
Big Jobs Friday hit and the data was quite strong.
Tale of the Tape:
– Non-Farm Payrolls for June 224K vs. estimates of 160K
– NFP for May revised from 75K to 72K
– NFP for April revised from 224K to 216K
– The more closely watched three month rolling average is at a very healthy level of 171,000
– The Average Hourly Earnings rate rose 6 cents to $27.90 per hour.
– Average Hourly Earnings on a YOY basis increased by 3.1% which matched May’s pace. The expectations were for a pace of 3.2%.
– Average Hourly Earnings on a MOM basis increased by 0.2%, the market was expecting 0.3%
– The Unemployment Rate rose from 3.6% in May to 3.7% in June. The market expected 3.6%.
– The Labor Force Participation Rate increased from 62.8% in May to 62.9% in June.
– The June ISM Non-Manufacturing (Services) hit close to the mark with a 55.1 vs. 55.9 estimate. This is the lowest reading since July of 2017 but is still well above the expansionary level of 50.0.
– Services account for more than 2/3 of our economic output.
– ISM 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.
What’s on the Agenda for this Week?
Last week’s 10 day moving average ended up holding its ground, so it can be considered solid which will keep pricing at or near the best levels of 2019 this week. The only wild card is if Powell’s testimony appears to be more “hawkish” towards no rate cut at the end of this month. Then, MBS may retreat down to the 25 day moving average. But barring that, look for MBS to remain in the same trading channel as last week for some great pricing.
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Domestic Flavor and (3) Geopolitical
(1) The Talking Fed: This is a big week for Fed speak. We will actually hear from Fed Chair Powell on three different days with the focus on Wednesday’s testimony in front of the House Financial Services Committee. Here is a complete schedule:
07/09 Bullard, Bostic, Quarles and Powell
07/10 Powell – House Testimony, Minutes from the last FOMC Meeting
07/11 Powell – Senate Testimony, Williams, Bostic, Barkin and Kashkari
(2) Domestic Flavor: There is some important domestic economic events that have the gravitas to move pricing this week with the spotlight on Thursday’s CPI.
(3) Geopolitical: Trade War can be lumped into this category as well. Any real news on movement with China/U.S. will get plenty of attention but there are also auto tariffs with Europe (Germany) and tariffs with Vietnam that are garnering attention. Iran/Syria are on the radar and so is the implosion of one the largest banks (Deutsche Bank). Also, the European Finance Ministers will meet.
Treasury Auctions this Week:
07/09 3 year note
07/10 10 year note
07/11 30 year bond
Consumer Credit: The May data was right in line with estimates ($17.1B vs. estimates of $17.0B).
On Deck for Tomorrow: JOLTS, NFIB Business Optimism, 3 year note auction, Fed Speakers: Powell, Bullard, Quarles and Bostic.
Across the Pond
Germany: Industrial Production 0.3% vs. estimates of -0.4%.