Learn from the Past
Overview
Mortgage backed securities (MBS) gained lost 22 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week, but they are still at the second best (lowest) levels of the year for rates.
Global concern over the trade war between U.S. and China remained very elevated which continued to make U.S. bonds very desirable as a safe-haven during this uncertain time. This strong need for safety (preservation of capital) keeps demand high for bonds which in turn, kept rates low for another week.
Trade War
Treasury Secretary Steven Mnuchin has designated China as a Currency Manipulator. It is the first time in 25 years that the Treasury Department has labeled a major trade partner as a currency manipulator. Meanwhile the PBOC says that it was not responsible for the fall of the Yuan and blamed external factors. White House Chief Economic Advisor, Larry Kudlow, says that the White House is hosting face-to-face trade talks in September.
Jobs
The June Job Openings and Labor Turnover Survey (JOLTS) was better than expected with a 7.348M vs. 7.317M estimate. This marks the 15th straight month of a reading above 7M unfilled jobs, which is a record.
Inflation Nation
The Headline Producer Price Index matched market expectations with a 1.7% pace. But the Core (ex food and energy) was lighter than expectations with a 2.1% vs. 2.4% reading. It was still above 2% though.
Central Bank Palooza: The Reserve Bank of New Zealand lowered their key interest rate from 1.50% down to 1.00%. The market was expecting a decrease down to 1.25%. The Reserve Bank of Australia kept their key interest rate at 1% which was expected.
What’s on the Agenda for this Week?
Overview
The market is fixated on the Trade War and the likelihood that it will go on for quite awhile and force Central Banks into a cycle of perpetual rate cuts that could cause many effective interest rates to be negative (real rate less inflation). Look for MBS to tread water which is just a slight step down from all-time highs. For the week, they could be -20 to +20 depending on the trade news.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War, (2) Domestic Flavor and (3) Across the Pond
(1) Trade War: The U.S./China trade war continues to be the primary focus of bond traders as we continue to approach the September 1st deadline for the new round of 10% tariffs on $300B worth of Chinese goods. Last week focused on the dollar/yuan relationship, and that will continue to be in the spotlight. The Geopolitical situation in Hong Kong is also in focus.
(2) Domestic Flavor: Last week was the PPI, and this week is the more important CPI as a measure of the consumer side of inflation. There will also be a critical retail sales report.
(3) Across the Pond: Germany (basically the only economic engine in the Eurozone), will release a very important GDP report that will get a lot of attention, particularly after Great Britain showed a negative GDP on a MOM basis last week. From China will be retail sales and industrial production.
Central Bank Palooza
Norway and Mexico will have Central Bank meetings on Thursday.
Market Wrap-up
Domestic Flavor
There were no domestic releases today.
Across the Pond
There was no major global economic data today.
On Deck for Tomorrow
CPI, Business Optimism, Germany: CPI, Great Britain: Unemployment Report.