What Happened Last Week?
Rally Accelerates After Weak PMI Data
Eurozone PMI data was much weaker in the Thursday session, leading to a big rally in bonds at home and abroad on Friday. 10-year yields were thus able to walk in the door down several bps, trading just over 2.80% after being nearly 30bps higher Thursday morning. Weaker non-manufacturing PMI in the U.S. only added to the gains. Bonds held most of those gains by the end of the trading day on Friday.
Source: Matthew Graham, Mortgage News Daily 7/22/22)
What’s on the Agenda for this Week?
Overview
This will be a monster week. What is the Fed’s real goal and what can impact mortgage backed securities (MBS) pricing this week?
Three Things
The three areas that have the greatest ability to impact MBS backend pricing are: (1) The Talking Fed, (2) Recession Watch and (3) Inflation Nation.
(1) The Talking Fed: They issue their latest interest rate decision and policy statement Wednesday at 2 pm ET followed by a live presser with Fed Chair Powell. The markets have fluctuated greatly over the past 3 weeks on expectations between a 75BPS and 100BPS rate hike at this meeting; but more importantly, the expectations of future hikes as far as how much at each additional meeting until they pause and then start to decrease rates. The bond market will be very sensitive to their statement regarding the progress of the QT program and if they will speed up the pace of decreasing their weekly bond purchases.
(2) Recession Watch: On Thursday will be the first print (to be revised several times) for the 2nd quarter GDP. The final reading on the 1st quarter GDP ended up at -1.6%, so if a second reading is below zero in a row it is technically classified as a recession. The markets are forecasting a range of +0.5% to +0.9% but could surprise lower.
(3) Inflation Nation: The Fed’s key measure of inflation will be issued on Friday with Core (ex food and energy) PCE. This is expected to show yet another massive MOM gain of 0.5% and a YOY gain of 4.7%. Headline PCE is expected to add another 0.9% on a MOM basis to get to a YOY increase of 6.7% (it was 6.3% last time around).
Market Wrap-up
Domestic Flavor
Artificial Demand: The Federal Reserve Bank of New York purchased 30Y MBS today:
- 4.0 $161M
- 4.5 $480M
- 5.0 $274M
Treasury Dump: Three days of dumping debt into the marketplace kicked off with the shorter term 2-year note auction. $45B went off at a high yield of 3.015%. The bid-to-cover ratio was 2.58.
On Deck for Tomorrow: Consumer Confidence, Richmond Fed Manufacturing, New Home Sales, Case Shiller HPI, FHFA Housing Price Index, 5-year Treasury auction. FOMC starts two days of meetings.