Learn from the Past
Overview
Mortgage backed securities (MBS) lost 36 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to edge up compared to the levels of the prior week
Domestic Flavor
Jobs, Jobs, Jobs: The March Job Openings and Labor Turnover Survey (JOLTS) showed that there were 6.191M unfilled jobs in March which was about 1 million less than Feb’s reading of 7.004M. The market was expecting 6.842M. Initial Weekly Jobless Claims were higher than expected (2.981M vs. estimates of 2.500M). Continuing Jobless Claims rose from 22.377M to 22.833M. New filings have now reached 36.5M since COVID-19 hit.
Retail Snails: Retail Sales were slow as a snail in April. The headline number dropped by -16.4% vs. estimates of -12.0%. Ex-Autos, Retail Sales dropped by -17.2% vs. estimates of -8.6%.
Manufacturing: April Industrial Production tanked the most in 100 years as it dropped by -11.2% which was actually a smidge better than expectations of -11.5%. Capacity Utilization fell to 64.9%. The May NY Empire Manufacturing Index came in at -48.5 vs. estimates of -63.5
Consumer Sentiment: The Preliminary May University of Michigan’s Consumer Sentiment was higher than expected (but was still low reading) 73.7 vs. estimates of 68.0.
Inflation Nation:
• One of the key measures of inflation crashed to its lowest level on record. The April headline Consumer Price Index YOY dropped to 0.3% vs. estimates of 0.4%.
• The more closely watched Core (ex food and energy) CPI YOY dropped to 1.4%, down from 2.1% in March and breaks a streak of 25 months at or above 2%.
• The April Producer Price Index YOY shrank by -1.2% vs. estimates of -0.2%.
• The Core (ex food and energy) YOY came in at 0.6% vs. estimates of 0.9% which is more than half of March’s pace of 1.4%.
Gasoline prices tanked (pun intended), dropped by -55.6% which is the largest decrease on record.
• The indexes for distilled bottled liquor and electric power increased though. Both clearly reflect the mass shift to staying at home.
What’s on the Agenda for this Week?
Overview
This is a holiday-shortened week with an early market close on Friday. Look for that channel between the 10 and 25 day MAs and the 50 day to be squeezed further.
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) Treasury Dump
(1) Coronavirus: The stock market(s) and media outlets are going bananas over “hopium” over a COVID 19 vaccine based upon news that a trial of eight (yep just eight) people got well with a vaccine, with a final vaccine (if all three phases of the trial go well) not going to be ready until 2021 at the earliest. But the bond market is once again focused on the real stories that impact the global macro economy. Primarily, experts are watching the world for areas that were hit by the pandemic earlier than the U.S. and appear to be tailing off in terms of new cases/deaths and the probability of a second and even third wave of cases.
(2) The Talking Fed: The Federal Reserve Bank of NY will continue its “taper” of MBS and purchase even less this week. They are dropping their Uniform MBS purchases down from last week’s $3.25B each day down to $2.97B of daily purchases this week. Keep in mind that the $2.97B will be evenly split among 2.5, 3.0 and 3.5 coupons which means only approximately $990M of that will be used to purchase the rate-setting 2.50 coupon. Fed Chair Powell will speak again (third time in 7 days), and the Minutes from the last FOMC meeting will be issued.
(3) Treasury Dump: The U.S. Treasury will issue a new animal that will compete for the same food source as MBS and is in direct competition as they revive the 20 year Treasury Bond on Wednesday.
Honorable Mention: Nearly 4 million homeowners are in some type of mortgage forbearance plan, representing 7.54% of all mortgages. Delinquencies are set to eclipse the great recession which peaked at 10%.
Market Wrap-up
Domestic Flavor
Taking it to the House: The May NAHB Housing Market Index rebounded by 7 points, and edged out forecasts (37 vs. 33). Still, well below 50 which is the demarcation of a positive reading.
On Deck for Tomorrow: Fed Chair Powell, Housing Starts and Building Permits.