Learn from the Past
Overview
Mortgage backed securities (MBS) lost 24 basis points (BPS) from last Friday’s close which caused fixed mortgage rates tick upward slightly compared to the prior week.
Domestic Flavor
Jobs, Jobs, Jobs: It was Big Jobs Friday, or should that be NO JOBS Friday. You can read the official BLS report here.
Here is the Tale of the Tape:
Jobs:
April Non Farm Payrolls -20.5M vs. estimates of -22.0M
March NFP revised from -701K down to -870K
February NFP revised from 275K down to 230K
Wages:
The national hourly wage rose by $1.34 to $30.01
Average hourly earnings YOY rose by 7.9% vs. estimates of 3.3%
Average hourly earnings MOM rose by 4.7% vs. estimates of 0.3%
Employment:
The Unemployment Rate rose to 14.7% vs. estimates of 14.0%
The U6 Underemployment Rate rose to 22.8% vs. estimates of 11.2%
The Participation Rate dropped from 62.7% down to 60.2%
The April Challenger Grey Corporate Job Cuts report hit jumped to 671K vs. March’s pace of 222K
Initial Weekly Jobless Claims added another 3.169M to the unemployment ranks which was close to market expectations of 3.0M
Continuing Jobless Claims rose to yet another new record high of 22.647M. The seven week tally is now 33.5M weekly claims
The April ADP Private Payrolls report hit a new low with 20.236M lost jobs; however, this was actually not too far off the market expectations of -20.050M.
Services: The April ISM Non Manufacturing Index (2/3 of our economy) showed a big contraction with a reading of 41.8, which is the worst reading since April of 2009. However, it is actually much better than expectations of 36.8.
Central Bank Palooza
The Bank of England kept their key interest rate at 0.1% which was widely expected. However, there were a few twists as some of the members wanted to increase their QE by $100B which is letting the market know that it could be a possibility to pass at their June meeting. They also warned that we could see the worst economic slump in 300 years. The Reserve Bank of Australia kept their key interest rate unchanged at 0.25%.
What’s on the Agenda for this Week?
Overview
There is a MBS coupon rollover tomorrow but that really only impacts warehouse lines at this point. The new trading channel that formed last week should hold as the Fed continues to reduce their daily MBS purchases.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Coronavirus, (2) The Talking Fed and (3) Domestic Flavor.
(1) Coronavirus: The key focus this week is on the “reopening” as many more states start to partially reopen this week with safe guards in place. So far, South Korea and Germany have seen big spikes in cases after reopening some of their economies. All eyes are on U.S./China Trade and “saber rattling.”
(2) The Talking Fed: The Federal Reserve Bank of NY will continue its “taper” of their daily MBS purchases. They have decreased the amount of purchases each week for the past 7 weeks. It will now drop to approximately $1.08B in 2.50 coupons daily. That is down from $1.32B last week. There is a large slate of speakers this week with the focus on a newly announced speech by Powell on Wednesday.
05/11 Charles Evans
05/12 James Bullard, Randal Quarles, Patrick Harker and Loretta Mester
05/13 Jerome Powell, Atlanta Fed Business Inflation
05/14 Neel Kashkari, Robert Kaplan, Fed’s Balance Sheet
(3) Domestic Flavor: There are several key reports this week with Initial Claims once again getting the most weight, But there will also be key inflation readings with CPI, PPI and Import Prices, and Retail Sales.
Treasury Dump
Here is this week’s Treasury auction schedule
05/11 3 year note
05/12 10 year note
05/13 30 year bond
Market Wrap-up
Domestic Flavor
Treasury Dump: The week kicked off with the shorter term 3 year note auction. $42B went off at a high yield of 0.23% which is the lowest yield on record for that auction.
On Deck for Tomorrow: CPI, CPI ex food and energy, 10 year Treasury note auction, Agency MBS monthly coupon roll over
Central Bank Palooza
The European Central Bank’s latest expansion of QE was ruled as “unconstitutional” by Germany’s courts and gave the ECB 3 months to roll back and correct the issue. Now, the ECB is looking to sue the German court over their ruling.