What Happened Last Week?
All in All a Pretty Logical Week
It seems weird to consider, but Friday’s trading–and indeed, the week’s trading as a whole–was fairly logical. By the end of the previous week, econ data provided evidence that rates didn’t need to go any higher. Last week’s data didn’t exactly confirm that in an overly forceful way, but it absolutely didn’t offer any arguments. Friday’s jobs report was the latest and most interesting example with revisions, unemployment, and wages doing more than enough to offset the higher headline compared to expectations. After Friday, the past two months of NFP readings made a lot more sense. It also made sense that bonds rallied modestly. 200k+ is still strong. Sub 4% unemployment is still low, but it’s this week’s CPI that can truly determine just how quickly we can forget February’s unfriendly data.
Source: Matthew Graham, Mortgage News Daily 3/8/2024)
Overview
This is a very big week with lots of data to digest prior to next week’s FOMC meeting.
Three Things
The three areas that have the greatest ability to impact MBS backend pricing this week are: (1) Inflation Nation, (2) Retail Sales and (3) Treasury Dump.
(1) Inflation Nation: There are many economic releases that contain inflationary data such as Import Prices and Consumer Sentiment Inflation Expectations. But it will be CPI and to a lesser extent PPI which will drive pricing this week. Both headline and core CPI are expected to show continued monthly expansion; the degree of that expansion will have a major impact on MBS pricing.
(2) Retail Sales: After a large contraction in the previous Retail Sales report, things are expected to pick up again in this report. The stronger this report is, the worse it will be for MBS pricing.
(3) Treasury Dump: There is a record amount of longer issuance debt this week. MBS have had a very strong correlation to the results of the 30-year Treasury bond auctions. Both the 10Y note auction and the 30Y bond auctions occur after the CPI report and will have a negative reaction to a high CPI release. Here is this week’s schedule:
- 03/11: 3Y Note
- 03/12: 10Y Note
- 03/13: 30Y Bond
Market Wrap-up
Domestic Flavor
Inflation Nation: The NY Fed Consumer Survey showed that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%.
Treasury Dump: Three days of dumping debt into the marketplace kicked off with the 3-year note auction. It was well received with foreign buyers snapping up the supply. $56B went off at a high yield of 4.256% and a bid-to-cover ratio of 2.60.