Learn from the Past
Mortgage backed securities (MBS) gained just 5 basis points from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week and remained near their lowest levels of the year.
There continued to be very strong economic data which caused market participants to begin to question the need for a Fed rate cut this week. 2nd quarter GDP beat out estimates with a solid growth rate of 2.1% and Durable Goods Orders were almost three times higher than expected.
There was the first look at the 2nd quarter GDP and it was much better than expected. The Headline number grew at 2.1% pace vs. estimates of 1.8%. The Price Index broke well above 2.0% with a 2.5% reading, which is a significant movement from the Q1 pace of 0.8%. PCE QoQ was at 2.3% vs. estimates of 0.6%. Core PCE QoQ hit 1.8% vs. estimates of 2.0%.
Durable Goods Orders
The June Headline Durable Goods Orders were much higher than expected (2.0% vs. estimates of 0.7%). When you strip out the volatile transportation sector, it was up 1.2% vs. estimates of 0.2%. The most important reading is the Ex-Defense which was up 3.1% vs. estimates of 1.3%.
Central Bank Palooza
The European Central Bank kept their key interest rate at 0.0% and their deposit rate at -0.4%. President Mario Draghi said that the ECB is waiting for new economic forecasts before pressing the button on new stimulus that would require preparation in a situation that remains complex.
Kick the Can
President Donald Trump and congressional leaders struck a two-year U.S. debt ceiling and budget deal. The budget deal would raise U.S. discretionary spending to $1.37 trillion in fiscal year 2020, up from $1.32 trillion this year. The deal moves the U.S. closer to dodging the threat of debt default and automatic, across-the-board spending cuts. It also could prevent a government shutdown when funding expires after September 30, though lawmakers will have to pass separate appropriations bills for that measure.
Boris Johnson is the new British Prime Minister which was widely expected over the past month. Most likely not much will happen with Brexit until the cabinet and parliament return from their summer break in September.
What’s on the Agenda for this Week?
Traders and Pundits alike are all billing this week as the most important week of 2019, with some saying it might be the most important week in a decade. China trade talks are resuming in China this week; three of the top five global economic countries have Central Bank meetings; and a deluge of big-name domestic and foreign economic data will hit.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Central Bank Palooza, (2) Inflation Nation and (3) Jobs.
(1) Central Bank Palooza: We will hear from the Central Banks of three of the world’s top five economies this week with the Bank of Japan, Bank of England and our own Federal Reserve. The Federal Reserve will get the lion’s-share of the attention from bond traders this week. The long bond market (which included MBS) is pricing in about an 85% chance of a 25 basis point rate cut which would be the first rate cut by the Fed in over a decade (2008). So, if that is what the Fed actually does, then there will be little to no reaction by MBS. However, if they lower their rate by 50 basis points, MBS will rally. But, if they do not lower rates at all, MBS will sell off.
(2) Inflation Nation: Friday’s GDP report showed some very high QoQ PCE data, but that is very old data at this point. The same day that the Fed starts two days of meetings, we will get the June PCE data. The Core YOY PCE data point is what the Fed uses as their official measure of inflation. The market is expecting a reading of 1.7%. A reading of that or below should solidify the Fed cutting rates the next day. However, if that hits 1.9% or above, then the odds of any type of rate cut will diminish considerably.
(3) Jobs: Friday’s jobs report is expecting the Unemployment Rate to remain near historically low levels with a 3.7% reading. But the market focus will be on the YOY Average Hourly Earnings rate which is being estimated in the 3.2% range.
Chicago Fed National Activity Index: The June reading was very tame with a -0.2 reading vs. estimates of 0.0.
Dallas Fed Manufacturing Index: This regional report for July was an improvement over June’s pace but was a little weaker than expected (-6.3 vs. estimates of -5.0)
On Deck for Tomorrow: Personal Income, Personal Spending, PCE, Bank of Japan, Case Shiller Home Price Index, Pending Home Sales, Consumer Confidence and the start of two days of FOMC meetings.