Learn from the Past
Mortgage backed securities (MBS) gained 29 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower compared to the prior week.
The economic back drop was quite robust with real strength in the labor and services sectors. But concerns over severe supply chain disruptions due to the Coronavirus caused fear and panic purchasing of long bonds. That spike in demand caused MBS to reach historic highs which also means that fixed mortgage rates hit historic lows.
ISM: The February ISM Non Manufacturing (2/3 of our economy) was much stronger than expected (57.3 vs. estimates of 54.9), New Orders skyrocketed to 63.1 vs. estimates of 56.3, and the Employment Index was 55.6 vs. estimates of 54. The February ISM Manufacturing Index continues to show expansion in the Manufacturing Sector, just breaking above the 50.0 mark with a 50.1 reading vs. estimates of 50.5.
Jobs, Jobs, Jobs: Big Jobs Friday. You can read the official BLS release here.
Here is the Tale of the Tape:
• February Non Farm Payrolls (NFP) increased by 273K vs. estimates of 175K
• January NFP revised upward from 225K to 273K
• December NFP revised upward from 147K to 184K
• This makes the closely watched 3 month rolling average 245K job gains each month!
• The national Average Hourly rate rose 9 cents to $28.52
• The Average Hourly Earnings MOM rose by 0.3% vs. estimates of 0.3%
• The Average Hourly Earnings YOY rose by 3.0% vs. estimates of 3.0%
• The Unemployment Rate dropped from 3.6% down to 3.5%
• The Participation Rate remained at 63.4%
• The U6 Employment Rate rose from 6.9% to 7.0%
The Talking Fed
The Fed released their Beige Book. You can read the official release here.
Some key points:
• Tariff fears which had been persistent for over a year have abated and been replaced with Coronavirus fears and election uncertainty.
• Economic activity expanded at a modest to moderate rate over the past several weeks, according to the majority of Federal Reserve Districts. The St. Louis and Kansas City Districts, however, reported no change during this period.
• Employment increased at a slight to moderate pace overall, with hiring constrained by a tight labor market, and “insufficient labor lowered growth for many firms and led to delays in construction projects.” Several employers changed from temporary to permanent workers in order to attract talent, and firms made efforts to retain workers such as keeping seasonal workers on staff in the off-season.
Central Bank Palooza:
The Bank of Canada lowered their key interest rate to 1.25% from 1.75%, which matches Tuesday’s Fed Reserve cut of 50 BPS. The Reserve Bank of Australia lowered their key interest rate from 0.75% down to 0.5%; this was NOT expected. The Federal Reserve cut their key interest rate by -50 BPS, it was a unanimous decision.
What’s on the Agenda for this Week?
There are new record low mortgage rates this week. But the question is not if pricing is going to improve (it will), it is to what degree will there be spikes in pricing.
The three areas that have the greatest ability to impact back end pricing are: (1) Coronavirus, (2) Central Bank Palooza and (3) Texas Tea, Black Gold.
(1) Coronavirus: As it has been for the past couple of weeks, the continued spread of the Covid-19 virus will get the most attention of the market place and it will only escalate each week for the near term. The bond market is certainly paying very close attention to the headlines.
(2) Central Bank Palooza: On deck is the European Central Bank. The United States made an emergency cut last week and Canada cut their regularly scheduled meeting along with a few other countries. The ECB will meet on Thursday and with an interest rate of zero percent already, the market is eager to see if they will go to the dark-side of the force and go to negative interest rates.
(3) Texas Tea, Black Gold: Ole Jed Clampett is no longer a millionaire, as global oil prices tumble to $25. This is due to a few reasons. First, oil has been under pressure anyway as production in China has crawled to a stop as well as other major industrial production hubs. But last week OPEC had agreed to cut daily production by 1.5 million barrels; Russia, however, was not on board. This week Saudi Arabia and Russia are now in a deadlock to see who blinks first, which is sending oil prices to some of their lowest levels in history.
There were no domestic economic releases today.
On Deck for Tomorrow: 3 year Treasury note auction
V.P. Mike Pence addresses the nation today.