Learn from the Past
Overview
Mortgage backed securities (MBS) gained 34 basis points from last Friday’s close which caused fixed mortgage rates to move slightly lower compared to the prior week.
Domestic Flavor
Personal Consumption: The Fed’s key inflation measuring stick, Core PCE YOY, was exactly half of their target rate (1.0% vs. 2.0% target rate), market expectations were for a reading of 0.9%. Headline YOY PCE was 0.5%. Personal Income MOM dropped by 4.2% after April’s big spike of 10.8%; estimates were in the -6.0% range. Personal Spending increased by 8.2% vs. estimates of 9.0%.
Gross Domestic Product (GDP): The final revision to the 1st quarter GDP remained at -5.0%. Prices Paid remained at 1.6%.
Jobs, Jobs, Jobs. Initial Weekly Jobless Claims were higher than expected (1.480M vs. estimates of 1.300M) but did “dip” below 1.500M. Continuing Claims came in below 20M for the first time in several weeks and was a little better than market expectations (19.522M vs. estimates of 19.968M).
Manufacturing: May Durable Goods Orders were much better than expected with the headline reading gaining 15.8% vs estimates of 10.9%, which doesn’t exactly fill April’s big hole of -18.1%. When you strip out transportation, it came in at 4.0% vs estimates of 2.5%. The June Richmond Fed Mfg Index was 0.0 vs. estimates of -41, meanwhile the Markit Flash PMIs for manufacturing were 49.6 vs. estimates of 48 and services were 46.7 vs. estimates of 46.5
Taking it to the House: The May New Home sales data hit 676K vs. estimates of 640K, but April was revised lower from 623K down to 580K. Weekly Mortgage Applications dropped -8.7%, led by Refinances which fell by -12.0%. Purchase Applications moved lower by just -3.0%. The April FHFA Housing Price Index MOM gained 0.2% vs. estimates of 0.1%. May Existing Home Sales were lighter than expected (3.91M vs. estimates of 4.12M) but time on the market dropped. Median sales price increased and there was a little more inventory available.
What’s on the Agenda for this Week?
Overview
This is a holiday-shortened week as the bond market closes early on Thursday and is closed on Friday in observance of July 4th Independence Day. The rising and escalating Covid-19 data continues to concern long bond traders that our recovery type could be a “U” or an “L”, which is bond friendly and will keep mortgage rates at or near their lowest levels of the year. It will take very strong economic readings to cause MBS to retreat.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) VWUL, (2) Jobs, Jobs, Jobs and (3) The Talking Fed.
(1) VWUL: What does that stand for? Those are the various recovery line chart patterns that closely resemble a letter in our alphabet. A “V” recovery is a very sharp rebound while a “U” recovery has a sharp rebound but only after a long period of recession. The number of Covid-19 cases, infection rates and hospitalization rates are a huge factor in projections for the letter shape of the recovery. Today’s headlines are not pointing towards a “V”:
• Health and Human Services Secretary Alex Azar warned Sunday that the “window is closing” to curb the spread of the virus and get the outbreak under control.
• Yelp reports that 41% of businesses that have a listing on the popular directory have closed permanently.
(2) Jobs, Jobs, Jobs: There is a huge dose of jobs and wage data this week, much of it on Thursday as the bond market is closed on Friday. Some of the key readings are the Unemployment Rate, Average Hourly Wages, Non Farm Payrolls, Initial Weekly Jobless Claims, ADP Private Payrolls and some internal employment readings in ISM manufacturing.
(3) The Talking Fed: Fed Chair Powell and Treasury Secretary Mnuchin will speak on Tuesday as they testify before Congress on the status/implementation of the CAREs Act and other emergence measures.
Market Wrap-up
Domestic Flavor
The May Pending Home Sales Index (contract signed but not closed and is only statistical sample from certain metro boards) jumped by 44.3% which was much higher than expectations of 19.7%. But that is climbing out of a big hole of April’s contraction of -21.8%.
On Deck for Tomorrow
Fed Chair Powell and Treasury Secretary Mnuchin testify, Case-Shiller Home Price Index, Consumer Confidence.