Learn from the Past
Mortgage backed securities (MBS) lost 40 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to edge slightly higher compared to the levels of the prior week.
Jobs, Jobs, Jobs: It was Big Jobs Friday! Here is the Tale of the Tape:
• May Non Farm Payrolls showed GAINS of 2.509M vs. expectations of a loss of -8.00M jobs
• April NFP was revised from -20.5M to -20.687M
• March NFP was revised from -881K down to -1.4M
• The Average Hourly Wage fell by 29 cents to $29.75
• YOY the gain in wages increased by 6.7% which below the forecast of 8.5%
• The Unemployment Rate is 13.3% vs. estimates of 19.8%
• The U6 Under Employment Rate is 21.2% vs. est. of 22.8%
• The Participation Rate is 60.8% vs. last month’s pace of 60.2%
• The May ISM Non-Manufacturing (services account for 2/3 of our economy), contracted with a reading of 45.4 vs. estimates of 44
Central Bank Palooza
The European Central Bank kept their key interest rate at 0.0% and announced an additional 600B Euros of stimulus which was more than the market expectations of 500B. The Bank of Canada kept their key interest rate at 0.25%
What’s on the Agenda for this Week
It was a very volatile week last week with over a -100BPS swing from best to worst pricing of the week. But it will take something completely unexpected from the Fed meeting to see that kind of volatility again this week.
The three areas that have the greatest ability to impact pricing this week: (1) The Talking Fed, (2) Trade War and (3) Coronavirus.
(1) The Talking Fed: The Federal Reserve Open Market Committee (FOMC) will conclude two days of virtual meetings on Wednesday with their latest Interest Rate Decision and Policy Statement. They were also supposed to release their Economic Projections (dot plot chart) but that appears to be on hold. Fed Chair Powell will also have a live virtual press conference that afternoon. MBS traders will be looking for more information on their “taper” of MBS and Treasury purchases.
(2) Trade War: The growing rhetoric and “war of words” between the U.S. and China continue to drive concern over implementation of Phase I as well as many other trade/military/economic concerns.
(3) Coronavirus: The pandemic and the impact on our economy continues to be a major factor in long bond prices even though it appears that the stock markets have moved passed the issue. Here are some key developments to start our week:
• New York City begins lifting some lockdown restrictions today, which is exactly 100 days since their first confirmed Covid-19 case
• New Zealand declares itself “Coronavirus free” and lifts all restrictions except for border controls
• Global cases continue to rise and now top 7 million
• U.S. bankruptcies soar 48% in May, the most since the last financial crisis
Here is this week’s Treasury auction schedule.
06/08 3 year note
06/09 10 year note
06/11 30 year bond
The three year treasury note auction went very well with $44B sold at 0.28% and a bid to cover ratio of 2.55.
On Deck for Tomorrow
FOMC meeting begins, Small Business Optimism, JOLTS, Wholesale Trade and the 10 year Treasury note auction.