Learn from the Past
Mortgage backed securities (MBS) lost 77 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week but closed the week at the second lowest rates in history.
MBS (the only thing that mortgage rates are based on) closed the week out at their second best Friday on record. Of course the prior Friday was the best level on record. The pullback in MBS was mostly due to the Federal Reserve pulling back the amount of direct purchases of MBS that they were making by $10B.
Jobs, Jobs, Jobs: It was Big Jobs Friday last week! You can read the official Bureau of Labor and Statistics report here.
Tale of the Tape:
Non Farm Payrolls (NFP) March -701K vs. estimates of -100K
NFP February revised upward from 273K to 275K
The rolling three month average is now -71K
The national Average Hhourly Earnings rate rose by 11 cents to $28.62 per hour
The MOM gain in Average Hourly Earnings is 0.4% vs. estimates of 0.2%
The YOY gain in Average Hourly Earnings is 3.1% vs. estimates of 3.1%
The Unemployment Rate increased to 4.4% vs. estimates. of 3.8-4.0%
The U6 Under Employment Rate increased to 8.7% vs. estimates. of 7.1%
The Participation Rate fell to 62.7% vs. estimates. of 63.3%
Services: The March ISM Non Manufacturing Report (2/3 of our economy) was much stronger than expected, showing an expansion at 52.5 vs. market expectations for a contraction of 44.0.
Manufacturing: The March national ISM Manufacturing PMI was much stronger than expected (49.1 vs. estimates of 45.0) but still showed contraction with a reading below 50. Prices Paid (a measure of inflation) dropped to 37.4 vs. estimates of 41.2. The March bellwether Chicago PMI was much better than expected (47.8 vs. estimates. of 40.0) but still was in contraction territory with a sub-50 reading.
What’s on the Agenda for this Week?
The bond market will close early on Thursday at 2:00 PM ET and will be closed on Friday. The Fed will only be purchasing MBS from Monday until Thursday at 11:30 AM ET.
The three areas that have the greatest ability to impact backend pricing this week: (1) Coronavirus, (2) The Taking Fed and (3) Stimulus.
(1) The Coronavirus: The headlines will continue to be the driving force this week.
(2) The Talking Fed: The FOMC will issue the Minutes from their last FOMC meeting, which didn’t really happen – it was more or less a perpetual Fed meeting with Fed action of some form every day. Two weeks ago, the Federal Reserve Bank purchased $50B of MBS, and it was heavily weighted towards the 2.5 and 3.0 coupons. But last week, that was dropped to $40B and the benchmark 2.5 and 3.0 coupons were only purchased in the morning and not throughout the day like the previous week. This week, the Fed will move back to multiple purchases of those coupons at different time periods during the day.
(3) Stimulus? The huge CARE Act has yet to get any real traction. Those $1,200 (plus $500 per child) payments have yet to hit anyone’s checking account and won’t for at least another week – even longer for those that need a check instead of direct deposit. And the PPP loans, while $38B has been committed have not gone (and will not go) to the small businesses that need them as the major banks (BofA, JPMorgan, Wells, etc.) are insisting on a prior lending (not just banking) relationship with the small business and are actually underwriting for risk as opposed to the Act which states that credit and income of the business should not be taken into consideration. So basically, the businesses that would otherwise already get approved for some type of financing are simply getting a better rate. The small mom and pop restaurants, etc., are getting no help. That leaves the door wide open for the fourth round of stimulus/relief and details about that proposal will get the attention of bond traders.