Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 1 basis point (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways for the week.
The bond market had a very big week for economic data and events. It started with PCE hitting 2% (the Fed’s “trigger”) rate but then was followed by the Fed meeting where they stressed that they won’t react to inflation hitting 2% just once, they want to see a trend line. There was also very strong manufacturing and services data as well as a very solid jobs report.
Domestic Flavor
Fed’s Target Rate met? Yes…but there is a catch. While the Fed’s official measure of inflation is the Personal Consumption Expenditures (PCE), there are several key reports that are all at 2.00% or above (all reports have been released in the last 30 days):
PCE YOY – 2%
Average Hourly Earnings – 2.7%
GDP – 2.3%
CPI YOY – 2.4%
PPI YOY – 3.0%
WTI Oil – $68.89 now vs. $48.84 1 year ago, 36.36% increase.
PCE: The March YOY Headline PCE showed an increase from 1.7% in February to 2.0% in March. The Core (Ex food and Energy) reading moved from 1.6% in February to 1.9% in March. Both of these data points matched the market expectations.
Manufacturing: April ISM Manufacturing hit 57.3 vs. estimates of 58.3. Anything above 50 is expansionary and a reading near 60 is very strong. ISM Prices Paid (another key measure of inflation) jumped to 79.3 vs. estimates of 78.0.
Services: The national ISM Non-Manufacturing Services report (2/3 of our economy) was lighter than expected (56.8 vs. estimates of 58.1) but still at a very moderate and expansionary pace.
Jobs, Jobs, Jobs: It was Big Jobs Friday!!
April Non-Farm Payrolls 164K vs. estimates of 190K
March NFP revised upward from 103K to 135K
February NFP revised downward from 326K to 324K
The rolling three-month average is now 208K so the bottom line is the trend is still above 200K
Unemployment:
The headline Unemployment Rate (U3) dropped from 4.1% down to 3.9%. The market was expecting 4.0%, and it’s the lowest since 2000.
The Participation Rate dropped to 62.8% from 62.9%.
The U6 Unemployment Rate (which includes part time workers for economic reasons and discouraged workers) dropped to 7.8% which is the lowest since 2001.
Wages:
Average Hourly Earnings increased again, this time by 67 cents to get to YOY level of $26.84 which is a 2.6% gain which matches March’s pace of 2.6% (downwardly revised).
On a MOM basis, Average Hourly Earnings increased by 4 cents for a change of 0.1% vs. estimates of 0.2%.
Hours Worked:
The Average Weekly Hours remained at its longer term trend of 34.5 hours, however Overtime ticked up by 0.1 to 3.7 hours which is normally a precursor to an increase in weekly hours.
The Talking Fed
The FOMC voted unanimously to keep their key federal funds rate in the range of 1.5% to 1.75% which was widely expected with markets only giving them a 25% to 30% chance of raising rates at this meeting.
Here are some key highlights:
• They removed the line about “monitoring inflation developments closely.”
• They also removed the prior statement that “the economic outlook has strengthened in recent months.”
• Change in inflation language: “On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.”
• FOMC statement now twice uses the word `symmetric’ to describe its inflation objective, emphasizing they view a persistent overshoot the same way that they view a persistent undershoot.
• Removal of the following language in its entirety: “The economic outlook has strengthened in recent months.”
• “Risks to the economic outlook appear roughly balanced” instead of “Near-term risks.”
What’s on the Agenda for this Week?
Overview
Last week, MBS gained just 1 BPS. The week before that, MBS had a net change of only 3 BPS…get the picture? We have had the FOMC, Jobs, Inflation, strong economic data, rising oil prices, locusts and more. Yet MBS move sideways. The 101.88 upper resistance appears to be very solid as it has been tested several times and has held up nicely. This level is well known by long bond traders and they will not take risk and add to their MBS positions at or above that level. It will take something very unexpected in the Geo-Political area to have any shot at better pricing this week.
Three Things
The Three Things that have the greatest ability to impact backend pricing this week are: (1) Geo Political, (2) Domestic Flavor, (3) Across the Pond.
(1) Geo Political: The trade/tariff concern with China, et al, will continue to be a very big focus of long bond traders this week. But now the Iran sanctions will be sprinkled on top of that as the current arrangement expires by the end of this week. NAFTA talks will also resume this week.
(2) Domestic Flavor: The most important data point is this Thursday’s Consumer Price Index as experts look to see if last week’s story of inflation keeps on moving forward. There will also be the Producer Price Index as well as Import Prices as measures of inflation.
(3) Across the Pond: The Bank of England will issue their latest interest rate and policy statement. Also this week will be the Minutes from the last Bank of Japan meeting and key PPI and CPI readings out of China.
Treasury Auctions this Week
05/08 3 year note
05/09 10 year note
05/10 30 year bond
The Talking Fed
05/07 Tom Barkin, Robert Kaplan and Charles Evans
05/09 Raphael Bostic
05/10 Fed’s Balance Sheet
05/11 James Bullard
Market Wrap-up
Overview
A real “yawner” to start of the week as today was void of any economic data with any gravitas and there were no significant Geo-Political moves that impacted MBS.
Domestic Flavor
Consumer Credit: The March reading hit 11.6B vs. estimates of 15.6B. The closely watched Revolving Credit component fell by 2.6B which could signal weak Retail Sales.
On Deck for Tomorrow: Fed Chair Jerome Powell (3:15am Eastern), JOLTS, 3 year Treasury Note auction.
Geo-Political
President Trump tweeted that he will make an announcement on the Iran sanctions by tomorrow at 2:00 Eastern.