Learn from the Past
Overview
Mortgage backed securities (MBS) lost just 7 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways compared to the previous week.
There was actually had a fairly strong round of domestic economic data with a small uptick in inflation (CPI) and very strong jobs data (JOLTS). But it was all trade talk, all the time last week with everyone’s attention on the China/U.S. trade talks which ended up in an increased tariff rate on Friday. MBS were confined in a very well-defined technical trading channel and effectively moved sideways for the week.
Inflation Nation
– The April Consumer Price Index moved a little higher than March’s pace. The Headline CPI YOY came in at 2.0% which was a tick higher than March’s 1.9%. The market was expecting 2.311%.
– Core (ex food and energy) moved from 2.0% to 2.1% which matched market expectations.
– The Headline CPI YOY came in at 2.0% which was a tick higher than March’s 1.9%. -The market was expecting 2.31%.
– Core (ex food and energy) moved from 2.0% to 2.1% which matched market expectations.
– The April Producer Price Index remained on the same pace as March.
– The Headline PPI YOY came in at 2.2% which was the same reading in March. The market was expecting 2.3%.
– Core (ex food and energy) remained at 2.4%, the market was expecting 2.5%.
Trade War
Tariffs engaged. The tariff rate of 10% was increased to 25% on $200B of Chinese goods as the two sides continue to negotiate.
Jobs, Jobs, Jobs
The March Job Openings and Labor Turnover Survey (JOLTS) once again came in above 7M with an extremely high reading of 7.488M vs estimates of 7.240M. Plus, February’s very high reading was revised upward. The trend of +1M more job openings than there are unemployed people looking for jobs continues and this time it is a new record with 1.7M more jobs available than unemployed. Also, a recent record high of Quits have increased since a low in August 2009 and have surpassed pre-recession levels. In March 2019, there were 3.4 million quits. This means that employees are leaving one job to go to another (presumably for higher wages/benefits).
Economic Optimism
The IBD/TIPP May reading was very robust and beat out expectations (58.6 vs estimates of 54.5).
What’s on the Agenda for this Week?
Overview
Look for the same channel as last week to hold even though MBS will most likely play above the upper resistance here and there. But trading above it and closing above it and/or a trend towards much better pricing is not likely unless there is a much larger escalation in the trade war. Look for a max gain this week of around +12BPS…the downside is around -19BPS.
Three Things
The three areas that have the greatest ability to impact your backend pricing this week are: (1) Trade War, (2) Across the Pond and (3) Domestic Flavor.
(1) Trade War: This has been a “trade snore” for the past couple of months but this classification is now upgraded due to actual, tangible escalation. On Friday, the U.S. increased the tariff rate from 10% to 25% on $200B of Chinese goods and announced plans to include another round of tariffs on Chinese goods that have not yet had a tariff. China has now issued their response which is to tariff $60B of U.S. goods which breaks down to 2,493 specific items but some of these tariffs are not new. 595 items were already tariffed at the rate of 5% and will remain at that rate. 974 new items will receive a 10% tariff and 1,078 items will move up to a new tariff rate of 20%. Also, while not an official announcement, China has allowed their media to “speculate” that other future actions could include dumping some U.S. Treasuries.
(2) Across the Pond: There are some really big economic releases this week that could change perception on global growth and inflation which is a huge factor in demand for long bonds.
China: Retail Sales, NPS Press Conference
Japan: Trade Balance
Germany: CPI, GDP
Eurozone: GDP, Employment Change, Trade Balance, CPI
Great Britain: Unemployment Rate
(3) Domestic Flavor: The biggest report of the week is the Retail Sales report on Wednesday. It’s really the only domestic release that has the ability to impact pricing. But this report has seen some wild swings lately and has been viewed with a lot of skepticism by economists.
Market Wrap-up
Overview
MBS made a couple of runs higher on the constant US/China trade news but (as expected) have been pulled back to the resistance level. It was a light open to the week with zero domestic or foreign economic data of any level that had the ability to impact pricing.
The Talking Fed
Federal Reserve Vice Chairman Richard Clarida said the U.S. economy is close to the central bank’s twin goals for full employment and price stability, making the current climate a good time to review its approach to monetary policy. Boston Fed President Eric Rosengren said, “The U.S. economy is strong enough to withstand the trade issue coming up now.”
Trade War
China has now issued their response which is to tariff $60B of U.S. goods which breaks down to 2,493 specific goods. Meanwhile, President Trump today discussed with the press that he is looking into getting farmers “a big check” to offset any reduction in orders from China.
On Deck for Tomorrow
Small Business Optimism Index, Import and Export Indexes.