Learn from the Past
Mortgage backed securities (MBS) gained 55 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
Inflation Nation: The May Consumer Price Index (CPI) showed no threat of inflation. The YOY Headline reading was just 0.1% and the Core (ex food and energy) increased by just 1.2%. Both readings were a tenth below market expectations. The May Producer Price Index (PPI) showed no threat of inflation. The YOY Headline reading was -0.8% which was a nice improvement over April’s -1.2% level but it’s still in the red. Core (ex food and energy) increased by just 0.3%. vs. estimates of 0.4%.
Jobs, Jobs, Jobs: Initial Weekly Jobless Claims hit 1.542M vs. estimates of 1.500M, so right as expected. Continuing Claims moved to 20.929M vs. estimates of 20.000M, so a little higher than expected. The May JOLTS (Job Openings and Labor Turnover Survey) showed that there were 5.046M unfilled jobs vs. estimates of 5.00M.
The Talking Fed
The FOMC released their Interest Rate Decision and Policy Statement on Wednesday along with their economic projections, followed by a live press conference with Fed Chair Powell.
Here are some key highlights:
• They kept their key interest rate at 0.25%.
• They announced that they would keep direct Treasury purchases at a pace of $80B per month and MBS at a pace of $40B per month but from June to July, that pace will be $96B of MBS due to reinvestment of principals received.
• The median “guestimate” of the FOMC members are -6.5% GDP for 2020 and then +5.0% GDP in 2021 and +3.5% in 2022.
• Fed’s Fund Rate to remain at 0.25% through 2022.
• Unemployment Rate for 2020 9.5%, 2021 6.5% and 2022 5.5%.
• Core Inflation to remain well below their target rate of 2%. 2020 1.0%, 2021 1.5% and 2022 1.7%.
What’s on the Agenda for this Week?
The three areas that have the greatest ability to impact backend pricing this week are: (1) The Talking Fed, (2) Central Bank Palooza, and (3) Coronavirus.
(1) The Talking Fed: After last week’s Fed action, economic projections and commentary by Fed Chair Powell, the markets are eager to see if Powell will “double down” on his tone. He will speak three times this week starting on Tuesday with the Senate Banking Committee, and with the same testimony the next day with the House Financial Services Committee. Here is this week’s key Fed speeches:
06/15 Robert Kaplan
06/16 Jerome Powell
06/17 Jerome Powell
06/19 Eric Rosengren, Randall Quarles and Jerome Powell
(2) Central Bank Palooza: This week will be the key Interest Rate and Policy Statements for the world’s 3rd largest economy, Bank of Japan, and the world’s 5th largest, Bank of England.
(3) Coronavirus: The markets continue to try and handicap when the pandemic will subside vs. the impact of a “second wave”. The CDC and WHO as well as the jump in new cases since most economies have opened to some degree has many concerned that the limited amount of economic openings may have to be restricted again which would be a major headwind to any economic growth.
The June Empire Manufacturing Index surprised to the upside, coming in at -0.25 vs. estimates of -27.5. In May, that reading was -48.5.
The Talking Fed
The Federal Reserve said that it will start to purchase individual corporate bonds. Previously, they were purchasing ETFs which would then purchase bonds.
On Deck for Tomorrow
Bank of Japan, Fed Chair Powell, Retail Sales, Industrial Production and Capacity Utilization, Business Inventories.