Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 47 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower from the prior week and hit their lowest levels of the year.
The shock of the proposed tariffs on China (the remaining $300B that are not already taxed would now be taxed at 10% effective September 1) put upward pressure on MBS for some great pricing. The Fed also cut their key interest rate but that had little to no impact on mortgage rates.
The Talking Fed
The much awaited Fed action finally happened.
Here is a summary:
- They lowered their key Fed Funding rate a 1/4 point.
- The Vote was 8-2 with the 2 “No” votes against any cuts and wanted the Fed to stand pat (Esther George and Eric Rosengren). Compare that to the last FOMC meeting which was 9-1 where they left rates alone and had one “NO” vote that wanted rates to be lowered.
- Overall, the tone of the statement actually was a little more positive about our economy than the last FOMC statement where they left rates alone. The Fed hung its hat on “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.”
Jobs, Jobs, Jobs
Big Jobs Friday! Here is the tale of the tape:
Jobs:
• July Non Farm Payrolls 164K vs. est. of 164K
• June Non Farm Payrolls revised from 224K down to 193K
• May Non Farm Payrolls revised from 72K down to 62K
• This makes the more closely watched rolling three month average 140K
Wages:
• The Average Hourly Rate moved upward by 8 cents to $27.98.
• The MOM change is 0.3% vs. estimates of 0.2%
• The YOY change is 3.2% vs. estimates of 3.2%
Unemployment:
• The U3 Unemployment Rate remained at 3.7% which was expected
• The Participation Rate moved from 62.9% to 63.0%
• The number of long-term unemployed dropped by 248K
• The U6 Unemployment Rate dropped to 7.0% which is very low
Overall, this was a very solid report.
What’s on the Agenda for this Week?
Overview
It’s all trade all the time this week. The rising actions and rhetoric on both sides have investors running for the hills. Long bonds like MBS are the beneficiary. This morning there was a very temporary spike in pricing that failed. So, there may be a temporary ceiling of resistance, but look for pricing to remain at or near last week’s highs which are the lowest rates of the year.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: 1 through 3 – China.
1, 2 and 3: Trade War with China. The U.S. announced last week that we would impose a 10% tariff on the remaining $300B worth of Chinese imports that were not already under some form of tariffs. This was after a dismal face-to-face negotiation in China that week. In response, China has announced that they will suspend agricultural imports from the U.S. (instead of buying more, which they had previously promised and never delivered) and have significantly devalued their currency (officially the PBOC says they didn’t do it and it’s a mystery to them).
Treasury Auctions this Week
• 08/06 3 year note
• 08/07 10 year note
• 08/08 30 year bond
The Talking Fed
• 08/05 Lael Brainard
• 08/06 James Bullard
• 08/07 Charles Evans
Market Wrap-up
Overview
The shock of the proposed tariffs on China (the remaining $300B that are not already taxed) yesterday will continue to put upward pressure on MBS today for some great pricing. A prolonged trade war can initially help pricing and then really hurt it in the long run.
Domestic Flavor
ISM Services: The July National ISM Non Manufacturing (Services) hit 53.7 vs. estimates of 55.5. Any reading above 50.0 is expansionary but this is the lowest reading in 3 years.
The Talking Fed
Fed Governor Lael Brainard (voting member) said at a forum at the Kansas City Federal Reserve bank, “I am certainly monitoring developments for their implications for the outlook and I will continue to be very attentive to them, I have said and others as well that we are committed to sustaining the expansion,” with further interest rate reductions if necessary.
Across the Pond
China: Caixin Services PMI 51.6 vs. estimates of 52.9.
Japan: Markit Services PMI 51.8 vs. estimates of 52.3.
On Deck for Tomorrow
JOLTS, 3 year Treasury Auction, Fed Bullard speaks.