What Happened Last Week?
Slightly Weaker, but Still in the Recent Range
Thursday proved to be a very forgettable session for the bond market with trading levels technically weaker on the day, but right in line with most of Wednesday’s trading. Mortgage backed securities (MBS) were actually a bit better than that with prices ultimately making it back to ‘unchanged’ levels even as 10-year yields remained 2-3bps higher. In the bigger picture, the new, lower rate range persists. Weaker GDP data and a weaker 7-year auction did nothing to challenge it.
What’s on the Agenda for this Week?
Intra-Day Lock Status: MBS are expected to continue to trade at very elevated prices this week but even in that environment there are limits to the upside and risk needs to be responsibly managed.
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Jobs, Jobs, Jobs, (2) Central Bank Palooza and (3) Covid.
(1) Jobs, Jobs, Jobs: It’s the first week in a new month which means the big jobs report is issued from the BLS. There is actually a jobs data deluge all week with employment indexes in the ISM Manufacturing and Services releases, ADP Private Payrolls, Challenger Job Cuts, Initial Weekly Jobless Claims, Non Farm Payrolls, Unemployment Rate, Average Hourly Earnings, Participation Rate and Average Work Week Hours. The overall strength (or lack thereof) will have a big impact on pricing.
(2) Central Bank Palooza: Kkey interest rate decisions and policy statements will be issued from the Reserve Bank of Australia and more importantly, the Bank of England. There will also be a slew of important speeches from our own Federal Reserve as the bond market continues to try to handicap the timing of the eventual taper.
08/05: Waller, Fed Balance Sheet
(3) Covid: The sharp rise of new cases among the vaccinated and unvaccinated alike continues to be a major driving force in a “flight to safety” which has helped bond yields in the past couple of weeks and looks to continue that positive support for pricing this week. Globally, in China the outbreak is now the broadest since the original outbreak in late 2019 as cases are being found in 14 of 32 provinces and is so recent that the concern is that will only grow. There are already MILLIONS on lockdown in China which looks to crimp the supply chain again. Domestically, we are seeing large spikes in cases as well and the CDC, White House and state and local governments are starting to tighten up guidelines which is likely to suppress the desire to reenter the workforce or to spend, which is negative for our economy.
Manufacturing: July ISM Manufacturing was very strong at 59.5 but was lighter than expectations of 60.9. Prices Paid were very high at 85.7 but much lower than June’s red hot pace of 92.1. The Employment Index jumped up from 49.9 to 52.9 which was welcome news.
Construction Spending: The June reading was much weaker than expected, 0.1% vs. estimates of 0.4%.
On Deck for Tomorrow: Factory Orders.