Learn from the Past
Mortgage backed securities (MBS) lost 58 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move slightly higher from the prior week.
Overall, the March economic data was very weak. Normally, this would help lower mortgage rates but instead rates ticked up on the reduction of demand on the buy side of the trade as the Federal Reserve purchased fewer MBS than they had the prior week.
Economic Indicators: The March Leading Economic Indicators dropped by -6.7 vs. estimates of -7.0. It is the worst reading ever on record.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims were higher than expected, coming in at 5.245M vs. estimates of 5.105M. Continuing Claims jumped to 11.976M but that was actually less than market expectations of 13.50M. This means that 22 million jobs have been lost in just 4 weeks. That wiped out ALL of the job gains that our economy picked up after our last recession.
Taking it to the House: March Housing Starts were 1.216M vs. estimates of 1.30M which is a sizable pullback from Feb’s annual pace of 1.564M. Building Permits were in line with estimates, 1.353M vs. estimates of 1.300M. Weekly Mortgage Applications increased by 7.3%, thanks to a pick-up of 10% in Refinance Applications. Purchase Applications fell for the 5th straight week, down -2.0%. The April NAHB Housing Market Index dropped to 30 vs. estimates of 55; it was hanging in the low 70’s for a while.
Manufacturing: The April Philly Fed Manufacturing Survey was dismal with a contraction of -56.6 vs estimates of -30. The April New York Fed Regional Manufacturing Survey for NY (Empire Manufacturing) tanked by -78.2 which was far worse than the projected pull back of -35.0. The March Industrial Production report was also dismal, down -5.4% vs estimates of -4.0%. Capacity Utilization was only 72.7% vs. estimates of 73.8%.
What’s on the Agenda for this Week?
The three areas that have the greatest ability to impact backend pricing are: (1) Coronavirus, (2) Talking Fed and (3) Stimulation Nation.
(1) Coronavirus: Of course, this is driving the other two “things.”
(2) The Talking Fed: The biggest player on the demand side of the MBS trade, the Federal Reserve Bank of New York, will once again purchase MBS this week but at a lower rate than last week. They purchased $3.188B of 2.5 and 3.0 coupons at 9:50am and then again at 1:00pm. Unlike the past three weeks, they are not purchasing any 15 year MBS and they are not purchasing Uniform (Fannie/Freddie) MBS above the 3.0 coupon – they had been purchasing 3.5 to 4.5 coupons over the past several weeks.
(3) Stimulation Nation: The funds for the SBA PPP loans ran out last Wednesday. The popular burger chain Shake Shack has said that they will return the $10M that they have already received. All eyes are on D.C. as they are looking to get an agreement to add more funds. It looks like the Senate may vote on it as early as Monday and the House potentially by Tuesday.
Manufacturing: The March Chicago National Activity Index dropped from 0.6 down to -4.19.
Stimulus: Senate Majority Leader McConnell says that there will not be a vote in the Senate today as the two sides continue to wheel and deal.
On Deck for Tomorrow: Existing Home Sales.
Central Bank Palooza
The People’s Bank of China lowered their key interest rate from 4.05% to 3.85%.