Learn from the Past
Mortgage backed securities (MBS) gained 27 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to edge slightly lower compared to the levels of the prior week.
Manufacturing: The May Chicago PMI contracted again, this time by 32.3 vs. estimates of 40. The April Headline Durable Goods Orders were -17.2% vs. estimates of -19%. When you strip out Transportation, it was down -7.4% which is half of market expectations of -14%. The May Richmond Fed Manufacturing Index hit -27 vs. estimates of -47.
Inflation Nation: The Fed’s key measure of inflation, the Core PCE YOY hit 1.0% vs. estimates of 1.1%. The headline PCE YOY was only 05%. The MOM Personal Spending dropped to record low of -13.6% vs. estimates of -12.6% but Personal Income blasted past estimates with a +10.5% vs. -6.5% reading.
GDP: The 1st quarter GDP was revised lower from -4.8% down to -5.0%.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims turned in another 2.123M unemployed vs. estimates of 2.100M. Continuing Claims fell from 24.912M down to 21.052M. There have now been over 40 million filings in 10 weeks.
The Talking Fed
Fed Chair Powell spoke on Friday. The only real key takeaway is that he once again pushed back at the negative interest rate scenario saying “the evidence is mixed,” and added that “we don’t think that is an appropriate tool here in the United States.” He also said, “We have institutional arrangements here that wouldn’t work with negative rates.”
The Federal Reserve released their Beige Book. The overall assessment of the economy was downgraded sharply with the Fed reporting that “economic activity declined in all Districts – falling sharply in most – reflecting disruptions associated with the COVID-19 pandemic” with the hardest-hit industries—because of social distancing measures and mandated closures— were retail, travel, and hospitality.
What’s on the Agenda for this Week?
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade War, (2) Coronavirus and (3) Jobs, Jobs, Jobs.
(1) Trade War This has leapfrogged COVID -19 as the biggest concern by long bond traders as the economic havoc from the virus is largely mapped out and priced in but the growing speculation and probability of a rekindled trade war between the U.S. and China could cause any future economic rebound to be pushed further out.
(2) Coronavirus: Domestically, focus is on the new data showing a spike in cases after the Memorial Day weekend in the states that have reopened and looking to see if that is leveling out as it could have been just a large amount of data that was held up and hit all at once due to the holiday weekend. Globally, Brazil (which denied the pandemic was real) has now joined the U.S. as the only other country above 500K cases. Great Britain is moving ahead with plans to lift restrictions even though daily deaths have not subsided. Meanwhile, in China, they can’t find a single active case of the virus in the epicenter of the breakout – Wuhan.
(3) Jobs, Jobs, Jobs: There is a ton of jobs related data this week, culminating in Big Jobs Friday with Non Farm Payrolls, Average Hourly Wages and the Unemployment Rate.
Central Bank Palooza
The Reserve Bank of Australia, Bank of Canada and the European Central Bank will issue important interest rate decisions and policy updates.
Manufacturing: The May ISM Manufacturing Index ticked up from April’s level of 41.5 to 43.1; the market was expecting something in the range of 43.6. Prices paid increased from 35.3 to 40.8. The Employment Index increased from 27.5 to 32.1.
Construction Spending: The April reading was less worse than expected (-2.9% vs. estimates of -6.5%).
On Deck for Tomorrow: Reserve Bank of Australia Interest Rate Decision, Total Vehicle Sales.