Learn from the Past
Mortgage backed securities (MBS) gained just 2 basis points from last Friday’s close which caused fixed mortgage rates to remain at the same very low levels as the prior week.
Manufacturing: The national ISM Manufacturing Index for June actually cracked back into expansionary territory with a reading of 52.6 vs. estimates of 49.5. Prices Paid were 51.3 vs. estimates of only 43.0 but the Employment Index was very low at 42.1.
Jobs, Jobs, Jobs: The BLS jobs report was issued on Thursday. Tale of the Tape:
• Non Farm Payrolls for June 4.800M vs. estimates of 3.000M.
• NFP for May revised from 2.509M up to 2.699M.
• NFP for April revised from -20.700M down to -20.800M.
• The June Unemployment Rate 11.2% vs. estimates of 12.3%; however, there were so many that didn’t know how to classify themselves in the household survey, with proper classification, that rate would be 12.2%.
• The U6 Underemployment Rate dropped from 21.2% in May down to 18.0% in June.
• The Participation Rate increased from 60.8% to 61.5%.
• The Average Hourly Earnings rate fell by 35 cents down to $29.37.
• YOY the increase is 5.0% vs. estimates of 5.3%.
• In a separate report (not from the time period covered by the big jobs report) Initial Weekly Jobless Claims hit 1.427M vs. estimates of 1.355M.
• Continuing Claims managed to stay below 20M for the third week with a 19.29M vs. 19.0M estimate.
• The June Challenger Job Cuts report showed a significant drop in announced corporate layoffs from a pace of 397K in May down to 170K in June.
• The June ADP Private Payroll report showed a monthly gain of 2.369M vs. estimates of 3.000M. However, the prior month was revised by 5M jobs from -2.760M all the way up to +3.6065M.
What’s on the Agenda for this Week?
I hope you had a great July 4th weekend! Look for MBS to trend right along the upper resistance at the 104.20 level like it did last week. What can cause that trend to change?
The three areas that can have the greatest impact on backend pricing this week: (1) Coronavirus, (2) Stimulation Nation and (3) Domestic Flavor
(1) Coronavirus: The crushing impact of the Covid-19 Pandemic on our economy continues as the markets have realized that the potential for a “V” shaped and quick recovery is not realistic with new daily records of cases rolling across the U.S. The main focus is that 29 states now have a positive test result of over 5%, under 5% is considered the demarcation for safety. As a result, travel plans are being cancelled and states are either pausing or even rolling back their openings. The weaker the economy and the more prolonged it is, the better long bonds like MBS perform.
(2) Stimulation Nation: The Senate is on a planned recess from July 3 to July 20. However, headline grabbing statements from Senators while stumping in their home states will give the markets some direction on the appetite for another round of stimulus checks, business loans and support for states’ budget shortfalls.
(3) Domestic Flavor: The biggest reports of the week are Monday’s ISM Non-Manufacturing, Thursday’s Initial Jobless Claims and Friday’s PPI Ex Food and Energy.
The national ISM Non-Manufacturing Index (2/3 of our economy) for June broke into expansionary territory with a reading of 57.1 vs estimates of 50.1. Prices Paid was 62.4 vs. estimates of 53.9. But the Employment Index was very low at 43.1.
On Deck for Tomorrow
Reserve Bank of Australia Interest Rate Decision, JOLTS, Economic Optimism, 3 year note auction.