Learn from the Past
Overview
Mortgage backed securities (MBS) lost 23 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move higher for the week. It was the second straight week of higher rates with MBS selling off a total of -39 basis points over the past two weeks.
There was very strong economic data all week with big readings in Manufacturing (1/3 of our economy) and Services (2/3 of our economy) and then ended the week with higher wage growth with the YOY Average Hourly Earnings hitting 2.9%.
Domestic Flavor
Non Farm Payrolls
August was better than expected, 201K vs. estimates of 191K.
July was revised lower from 157K down to 147K.
June was revised lower from 248K down to 208K.
The three month rolling average is now 185K.
Wages
The Average Hourly Earnings YOY rose by 2.9% vs. est. of 2.7%.
Earnings on a MOM basis rose by 0.4% vs. est. of 0.2%.
Average Hourly Wages are now $27.16.
Unemployment
The Unemployment Rate was unchanged at 3.9%.
The Participation Rate dropped from 62.9% down to 62.7%.
Services
The ISM Non-Manufacturing (2/3 of our economy) was very strong and beat out forecasts with a 58.5 vs. 56.8 estimates.
Manufacturing
The August ISM Manufacturing Index jumped to 61.3 vs. estimates of 57.7. It’s the best reading since January. Any reading above 60 is rare for this report and very robust. ISM Prices Paid hit 72.1 vs. estimates of 70.2…a very lofty level and yet another report that shows pricing pressures (inflation).
The Talking Fed
NY Fed Pres John Williams (voting member) said that steady inflation and low unemployment have created an economy that is “as good as it gets” for the U.S. but that “we can continue to be relatively patient and allow this economy to continue to grow.”
What’s on the Agenda for This Week?
Overview
In each of the past two weeks, MBS have been in a new and lower trading channel; will that happen again this week? Actually, the odds are slim. It will take some major trade agreements or significant movement forward on them for MBS to break below the new floor of support. Thursday will be the biggest day of the week with the combination of rate decisions by the Bank of England and ECB as well as our own CPI data. Look for MBS to “tread water” until that point but reclaiming last week’s losses are not in the cards. The best to hope for is to remain in the new trading channel and not make another “leg down” into a lower channel this week.
Three Things
The three areas that have the greatest ability to impact backend pricing this week are: (1) Trade Wars, (2) Central Bank Palooza and (3) Domestic Flavor.
(1) Trade Wars: Tensions between the U.S. and China increased on Friday when President Trump threatened taxes on practically all Chinese imports, threatening duties on $267 billion of goods over and above planned tariffs on $200 billion of Chinese products, and that is on top of the $60B in tariffs already in place. In total, this adds up to slightly more than ALL of the Chinese goods imported into the U.S. in 2017. China has said it will respond “in kind,” but they don’t import nearly that much from the U.S., so it is unclear what (if any) leverage they have. NAFTA is still in limbo as Canada and the U.S. are still trying to hammer out terms.
(2) Central Bank Palooza: The European Central Bank will take center stage, they are expected to hold their interest rate at 0.0% but the markets will be focusing on ECB President Mario Draghi’s live press conference afterwards to see if there is any slant towards timing of their first rate hike and if their plans to actually end their QE bond buying program by the end of this year are still on track. There will also be a rate decision by the Bank of England. Our own Federal Reserve will release their Beige Book which is compiled to be used in their next Fed meeting.
(3) Domestic Flavor: There will be several key reports this week that have the gravitas to move pricing. On the inflation front will be both PPI and CPI. The bond market will focus the most on CPI YOY ex-food and energy. Retail Sales on Friday will also get a lot of attention.
Treasury Auctions this Week
09/11 3 year note
09/12 10 year note
09/13 30 year bond
Market Wrap-up
Overview
As expected, MBS simply “treaded water,” confined to the new trading channel. There were no major economic releases today and no real movement on the trade-front.
Domestic Flavor
Consumer Credit: Jumped to the highest level this year with a $16.6B vs. estimates of $13.0B. However, much of that increase is in Auto and Student Loan debt. Revolving Credit (a theoretical proxy for spending) grew by only $1.3B in July.
On Deck for Tomorrow: Small Business Optimism, JOLTS, Wholesale Trade and a 3 year Treasury auction.
Across the Pond
China: CPI YOY was 2.3% vs. estimates of 2.2%. PPI YOY was 4.1% vs. estimates of 4.0%
Great Britain: GDP July was 0.3% vs. estimates of 0.2%.