What Happened Last Week?
Strong Data Redefining The Rate Outlook
Between Wednesday’s ISM Services data and Friday’s jobs report, the market was faced with two compelling “yeah buts” to what has generally been a symphony of economic bearishness over the past few weeks. Whereas inflation reports in June and July didn’t ultimately extend the market’s perceived timeframe for the Fed’s first rate cut in 2023 (i.e., June Fed Funds Futures were back to late May levels by the start of this week), the strong data abruptly changed that. After today, there’s little if any rate cut probability priced into 2023’s outlook. That will change, but until it does, it’s rough sledding for rates.
Source: Matthew Graham, Mortgage News Daily 8/5/22)
What’s on the Agenda for this Week?
Three Things
The three areas that have the greatest ability to impact mortgage backed securities (MBS) backend pricing this week are: (1) Inflation Nation, (2) Treasury Dump and (3) The Talking Fed.
(1) Inflation Nation: There will be key readings on Inflation this week with Wednesday’s CPI and Thursday’s PPI. The market will be focused on the MOM change more so than the YOY change. The YOY change is expected to move lower but that is not reflection of current trend. The lower this MOM change is, the better it will be for MBS pricing, the higher the rate of change is….the worse it will be for pricing.
(2) Treasury Dump: There are two key auctions this week with Thursday’s 30-year Treasury bond auction taking center stage as the most important of the week.
- 08/09 3 year note
- 08/10 10 year note
- 08/11 30 year bond
(3) The Talking Fed: Last week, there were some big moves in pricing in response to comments made by several Fed presidents. The bond market will continue to put a lot of weight on any commentary/speeches from Federal Reserve representatives since they are no longer providing any forward guidance as part of their policy statements. Evans and Kashkari will speak, and probably a few others via interviews. Experts will also pay close attention to the Atlanta Fed’s Inflation Expectations and the updated Fed Balance Sheet.
Market Wrap-up
Domestic Flavor
Inflation Nation: The New York Federal Reserve released its latest Consumer Expectations survey which showed a record drop in short-, medium- and longer-term inflation expectations: specifically, inflation expectations at the 1-year horizon decreased to 6.22% in July–the lowest since February–from the previous month’s 6.78%. It’s the biggest monthly drop on record as expectations about year-ahead price increases for gas and food fell sharply. At the same time, median three-year-ahead inflation expectations also declined, from 3.62% to 3.18%, lowest since April 2021. The median five-year ahead inflation expectations, surveyed intermittently since the beginning of this year, fell from 2.8% to 2.3%, after being stable at 3.0% during the first three months of the year.
On Deck for Tomorrow: 3 year note auction, Non-Farm Productivity and Unit Labor Costs, NFIB Small Business Optimism Index.