Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at their best (lowest) levels of 2019 for the fifth week in a row.
It was another week of positive economic data with better than expected manufacturing data and a very strong consumer with high Consumer Confidence and strong Personal Income and Personal Spending data. This would normally have caused mortgage rates to rise but the strong economic data was offset by concern and uncertainty over the trade war and a fast approaching Fed meeting.
Domestic Flavor
Consumer Confidence: Another fantastic reading! The blockbuster July reading was revised even higher from 135.7 to 135.8 and the August reading beat out expectations (135.1 vs. estimates of 130.0).
Personal Consumption: July Personal Income increased by 0.1% which at first glance looks a lot lighter than the consensus estimates of 0.3%. However, June was revised upward from 0.4% to 0.5% which is quite strong. Personal Spending continues to show major strength with a monthly gain of 0.6%. The headline PCE YOY came in at 1.4% vs. estimates of 1.3%, and the closely watched Core PCE YOY data was tame at 1.6% vs. estimates of 1.6%.
Manufacturing: The bellwether Chicago PMI showed a big rebound from 44.4 in July to 50.4 in August and right back into expansionary territory. The market was expecting a contractionary reading in the 47 range.
Taking it to the House: July Pending Home Sales Index fell by -2.5%; the market was expecting -0.3%. Weekly Mortgage Applications dropped by -6.2%, led by Refinances which plunged by -8.0%. The Case-Shiller 20 city metro Home Price Index showed a YOY gain of 2.1% in June. The May pace was 2.4%. The FHFA June Housing Price Index (takes into account every Fannie, Freddie and Ginnie mortgage) showed a national MOM gain of 0.2% which matched the pace in May.
GDP: The previously released 2nd quarter GDP was revised from 2.1% to 2.0% which is exactly what the market expected.
What’s on the Agenda for this Week?
Overview
Today’s weaker than expected ISM Manufacturing data will keep MBS in positive territory today (+6 to +15 range when the smoke clears) but for the week, look for MBS to remain in this 4 week long channel unless there is some type of trade truce/agreement… barring that, look for pricing trends to be very similar to the past couple of weeks.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War, (2) The Talking Fed and (3) Jobs.
(1) Trade War: On Sunday, the latest rounds of tariffs on Chinese imports went into effect. The slated 15% U.S. tariffs on approximately $112 billion in Chinese goods may affect consumer prices for products ranging from shoes to sporting goods. So far, the tariffs have not been seen in consumer prices but this latest round could directly impact common retail items. China retaliated with higher tariffs being rolled out in stages on a total of about $75 billion of U.S. goods. The target list strikes at factories and farms across the Midwest and South.
(2) The Talking Fed: With the next FOMC meeting right around the corner, the Beige Book will be issued this week which is prepared specifically for that meeting. There will also be a barrage of Talking Feds, including Fed Chair Powell, as next week starts the “black out” period for Fed speeches leading up to the FOMC meeting.
• 09/03 Eric Rosengren
• 09/04 Beige Book, John Williams, Robert Kaplan, Michelle Bowman, James Bullard, Neel Kashkari and Charles Evans
• 09/05 Fed’s Balance Sheet
• 09/09 Fed Chair Jerome Powell
(3) Jobs: There is a slew of jobs related data this week culminating with Friday’s big labor report. While the unemployment rate is expected to remain at a very low 3.7%, the bond market will focus on the change in the Average Hourly Earnings data set which is expected to hit 3.1% on a YOY basis.
Market Wrap-up
Domestic Flavor
Manufacturing: The August ISM Manufacturing data just barely missed the mark (49.1 vs. estimates of 50.5); however, it did come in below 50 which is a very big deal as it is a contractionary reading. There hasn’t been that type of reading since 2016 and it is reflective of a national slowdown in manufacturing.
Construction Spending: The July data was close to the mark (0.1% vs. 0.3%) and actually would have been a big beat if it were not for a very nice upward revision to June’s data from -1.3% to -0.7%.
On Deck for Tomorrow
Trade Balance, Fed’s Beige Book, Bank of Canada Interest Rate Decision.