Learn from the Past
Overview
Mortgage backed securities (MBS) gained just 10 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to remain at the same levels as the prior week.
Domestic Flavor
Manufacturing: The national ISM Manufacturing Index for April was better than expected with a 41.5 vs. 36.9 reading. However, this is one of the worst levels in many years and shows severe contraction in the manufacturing sector. Prices Paid were 35.3 vs. estimates of 35.0 and the Employment Index dropped from 43.8 down to only 27.5. The bellwether Chicago PMI April reading was dismal at 35.4 vs. estimates of 38, the worst level since 2009.
Construction Spending: The March reading surprised to the upside with a +0.9% reading vs. estimates of a drop of -3.5%. However, much of the March gain was due to a big revision lower to February’s reading.
Income vs. Spending: Personal Incomes dropped -2.0% vs. estimates of -1.5%, It was the biggest drop in MOM income since March 2013. Personal Spending fell into a bottomless pit, dropping by -7.5%.
GDP: The Preliminary 1st quarter GDP showed a contraction of -4.8% which is the worst since the financial crisis. The markets were expecting a range of -4.0% to -5.0%. Prices Paid (a measure of inflation) was actually higher than expected 1.4% vs. estimates of 1.2%.
Central Bank Palooza
The European Central Bank kept their key interest rate at 0.0%, ECB Chief Lagarde warns GDP to shrink by -12% in 2020.
The Talking Fed
The Federal Open Market Committee (FOMC) kept their key interest rate at 0.25%. Here are some key highlights of the statement and live comments by Fed Chair Powell:
• Powell said that the Fed would continue to purchase MBS as “needed” and “appropriate”, not laying out a long term schedule or guaranty of minimum purchases.
• The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy
• Powell said “The debt is growing faster than the economy. This is not the time to act upon those concerns.”
• The Fed pledged accommodative policy until the economy again reaches full employment and 2% inflation.
What’s on the Agenda for this Week?
Three Things
The three areas that have the greatest ability to impact backend pricing of MBS this week are: (1) Coronavirus, (2) The Talking Fed and (3) Jobs, Jobs, Jobs.
(1) Coronavirus: The headlines will continue to drive pricing once again as economists try to handicap just how bad and how long the recession will be. In focus this week are the states reopening, U.S. vs. China on trade and release of the Wuhan COVID-19 report as well as continued infection and spread rates.
(2) The Talking Fed: Their purchase schedule of MBS, primarily the Agency 2.5 and 3.0 coupons, continues to be one of the major driving forces in MBS pricing. Their concentration of purchases continues to decline and will be even lower this week for those two specific coupons. They are actually purchasing other coupons as well, 15 year, GNMA, FNMA 3.5, etc.
This week’s speaking schedule:
05/05 Charles Evans, James Bullard and Raphael Bostic
05/06 Raphael Bostic
05/07 Patrick Harker
(3) Jobs, Jobs, Jobs: This week has a ton of jobs data with ADP Private Payrolls, Weekly Jobless Claims, Challenger Job Cuts, Non Farm Payrolls, Unemployment Rate, Average Hourly Earnings and more. Usually the focus on the Jobs report is on wages (due to inflationary concerns) but this week it will be on the Unemployment Rate.
Market Wrap-up
Domestic Flavor
Manufacturing: The March U.S. Factory Orders MOM dropped by 10.3% vs. estimates of -9.7%.
On Deck for Tomorrow: ISM Services, Economic Optimism.