Learn from the Past
Mortgage backed securities MBS) gained 16 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at their best (lowest) levels of 2019.
The major economic reports for the week are actually quite positive and therefore negative for rates with much stronger than expected Retail Sales data and an uptick in inflation (CPI). However, this more than offset concern over the trade war between the U.S. and China, 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) kept demand high for our bonds which in turn, kept rates low for yet another week.
Retail Sales: The July data set was a blockbuster at more than double the market expectations. Headline Retail Sales hit 0.7% vs. estimates of 0.3%. Ex-Autos, Retail Sales were up 1.0% vs. estimates of 0.3%. The Control Group saw a 1.0% MOM increase vs. estimates of 0.3%. Very strong data.
Inflation Nation: The July Consumer Price Index was a little hotter than expected. The headline CPI YOY hit 1.8% vs. estimates of 1.7% and when you strip out food and energy, the Core CPI YOY was 2.2% vs. estimates of 2.1%.
Taking it to the House: New Housing Starts were lighter than expected (1.191M vs. estimates of 1.257M) but the good news is that Single Family Residences (SFR) actually increased by 1.9% to an annualized pace of 876K. Building Permits were higher than expected (1.336M vs. estimates of 1.270M). Again, the bright spot is the SFR sector with a solid rise to 838K on an annualized basis. The August NAHB Home Builders Market Index came in at 66 vs. estimates of 65. A very robust reading. Weekly Mortgage Applications shot up by a whopping 21.7%. Refinance Applications led the way with an increase of 37.0%. Purchase Applications increased by 2.0%
Consumer Sentiment: The University of Michigan’s Consumer Sentiment Index Survey was very low for their preliminary August reading (92.1). However, what is interesting is that inflation expectations among consumers moved higher to 2.7% over the next 12 months.
Central Bank Palooza
The Bank of Mexico cut their key interest rate from 8.25% down to 8.00%. The market was expecting them to keep the rate at 8.25%
What’s on the Agenda for this Week?
This is a very light week for economic data, and the data there will be does not have the gravitas to move the needle on pricing. The technical support and resistance levels are very well defined and quite strong. Look for MBS to remain within the channel until at least Wednesday’s FOMC Minutes release but will most likely be stuck in the same channel unless Powell and crew deliver some commentary that is not aligned with current market expectations. Germany is very key as well; if they do deliver a stimulus package for Europe, then (depending on what exactly it is), there could be some volatility. But the Trade War, German Stimulus and comments from our Fed are not quantifiable events and will be watched very carefully by the bond markets.
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War, (2) The Talking Fed, (3) Across the Pond.
(1) Trade War: Last week there was some volatility on both negative and positive trade stories. While there is nothing scheduled for this week, bonds will continue to react to any trade news.
(2) The Talking Fed: This is a big week for the Federal Reserve that really starts on Wednesday with the release of the Minutes from the last FOMC meeting where they cut rates but had a few dissenting votes. We will hear from Fed Chair Jerome Powell on Friday as part of the Kansas City Federal Reserve Bank’s annual Economic Symposium in Jackson Hole, Wyoming, that starts on Thursday. In addition to hearing from Central Bankers, there will be many papers and speeches by prominent economists, traders and bankers that will get a lot of attention.
(3) Across the Pond: This weekend will start the G7 meeting which will be very important but is outside of this week’s trading. But the markets are very focused on more speculation and discussion about Germany coming to the table with some fiscal stimulus.
The Talking Fed
Boston Fed President Eric Rosengren (a voting member) continued to push back against further interest-rate cuts by the central bank, arguing he’s not convinced that slowing trade and global growth will significantly dent the U.S. economy. He said, “We’re likely to have a second half of the year that’s much closer to 2% growth, I’m not saying there are not circumstances in which I’d be willing to ease. I just want to see evidence we are going into something that is more a slowdown.’’
Across the Pond
Eurozone: CPI YOY 1.0% vs. estimates of 1.1%.
On Deck for Tomorrow
Fed Randal Quarles speaks, Germany: PPI