Learn from the Past
Mortgage backed securities (MBS) lost 20 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher but remained near their lowest levels of the year.
There was an uptick in inflation (CPI and PPI), and that coupled with the prior week’s strong jobs data has bond traders pulling back their hedges for a 50 BPS rate cut from the Fed this month down to a 25 BPS. This pulled a little premium out of bond yields.
The headline June Core CPI (ex food and energy) YOY broke back above 2.0% and was a little higher than expectations (2.1% vs. estimates of 2.0%). CPI YOY hit 1.6% vs. estimates of 1.6% (ex food and energy). YOY broke back above 2.0% and was a little higher than expectations (2.1% vs. estimates of 2.0%). CPI YOY hit 1.6% vs. est. of 1.6%. The headline June Core PPI (ex food and energy) YOY was higher than expected (2.3% vs. estimates of 2.2%) and the PPI YOY was also higher than expected (1.7% vs. est. of 1.6%). These readings do not get the same weight as the CPI data does but these do show upward pricing pressure.
The Talking Fed
Fed Chair Jerome Powell gave his semi-annual monetary policy report to the House Financial Services Committee and the Senate Banking Committee. Here is the statement that he read to them.
Here are a few bullet points from his statement:
• Hawkish “The economy performed reasonably well over the first half of 2019, and the current expansion is now in its 11th year.”
• Hawkish “Our baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective.”
• Dovish “Inflation has been running below the Federal Open Market Committee’s (FOMC) symmetric 2 percent objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook.”
• Dovish “Growth in business investment seems to have slowed notably, and overall growth in the second quarter appears to have moderated. The slowdown in business fixed investment may reflect concerns about trade tensions and slower growth in the global economy.”
The Minutes from the last FOMC meeting certainly pointed to a rate cut at the July meeting. You can read the official Minutes here.
While once again the markets are focusing on the most dovish of notes, there was actually a mixed bag.
• Many Fed officials saw a stronger case for a rate-cut amid rising risks.
• Several officials didn’t yet see a strong rate-cut case.
• A few Fed officials saw a rate cut risking financial imbalances.
• Many Fed officials in June saw risks weighted to the downside.
What’s on the Agenda for this Week?
For MBS to reclaim last week’s selloff, there will need to be a very weak Retail Sales report on Tuesday and an even more dovish Powell on Tuesday. But if there is a solid Retail Sales report, MBS could move back towards the bottom of the trading channel.
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Across the Pond and (3) Domestic Flavor.
(1) The Talking Fed: The last barrage of Feds speak before we enter the “blackout” period next week where Fed officials keep quiet leading up to the Fed meeting. Obviously, Fed Chair Powell will get a lot of attention and so will the Beige Book which is prepared specifically to be used in July’s Fed Meeting. Here is the complete schedule:
07/15 John Williams
07/16 Jerome Powell, Michelle Bowman, Raphael Bostic, Robert Kaplan and Charles Evans
07/17 Beige Book
07/18 John Williams, Fed Balance Sheet
07/19 Eric Rosengren and James Bullard
(2) Across the Pond: The week started with China recording their weakest GDP growth rate in almost 30 years. Their 2nd quarter GDP came in at 6.2% which matched market expectations. But Retail Sales for June shot up 9.8% vs. estimates of 8.3%. There will also be key economic data from: Japan (Imports and Exports, CPI); Germany (PPI); Great Britain (Unemployment Rate, CPI and PPI); Eurozone (CPI); Canada (CPI).
(3) Domestic Flavor: With the Fed being “data dependent” and the U.S. seeing some solid economic data the last two weeks, this week’s data will get a lot of attention leading up to the Fed meeting. This week the most important reading is Retail Sales, followed by Industrial Production, Consumer Sentiment, Business Inventories, Import Prices and the Philly fed.
Manufacturing: The July regional Empire Manufacturing Index was much stronger than expected, coming in at 4.3 vs. expectations of only 0.8 and quite a large swing from June’s contraction of -8.6.
The Talking Fed
NY Fed President John Williams (voting member) spoke this morning but focused on the need to replace the LIBOR and did not address Fed policy on rates, etc.
Across the Pond
China: 2nd quarter GDP 6.2% vs. estimates of 6.2%. Retail Sales 9.8% vs. estimates of 8.3%.
On Deck for Tomorrow
Fed Chair Powell, Bank of England Gov. Carney, Retail Sales, Import Prices, Industrial Production and Capacity Utilization, Business Inventories.