What Happened Last Week?
Mortgage backed securities (MBS) gained +9 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways but it was a very volatile week. On Wednesday, we had the highest mortgage rates since March 6th. So far for the month of May, MBS are still down -34 BPS which means mortgage rates are still trending upward on a very slow pace.
Just how choppy was the week? Well, there was a net difference of -107BPS from intra-day highs to intra-day lows.
Jobs
Friday finally arrived and while there was some weakness…there was also some strength. This mixed bag of data probably has thwarted any chance of a June Fed rate hike, but September is still very much a possibility in bond traders’ minds.
Here is a breakdown of the bearish (bad) and bullish (good) rates:
- April Non-Farm Payrolls (NFP) 223K vs estimates of 218K – Bearish
- March NFP revised from 126K to 85K – Bullish
- 3 month moving average 191K – Bullish
- 6 month moving average 255K – Bearish
- Unemployment Rate 5.5% dropped to 5.4% – Bearish
- Average Hourly Earnings Month-over-month – 0.1% vs estimates of 0.2% – Bullish
- Average Hourly Earning Year-over-year – 2.2% which is over the Fed’s target inflation rate of 2.0% – Bearish
So as you can see, there is something for everyone in Friday’s data. On an intra-day basis this was positive for pricing and gave us the lowest rates of the week, but on a longer term trend line this data is not one sided enough to ensure better pricing/lower rates for the long term.
Our economy also saw some strong readings in Factory Orders, Unit Labor Costs, Initial Weekly Jobless Claims and a very strong reading in the ISM non-manufacturing (services) sector. Consumer Credit shot up but most of that increase was in student loan debt and auto loans instead of an increase in credit card debt which could have pointed the way towards more consumer spending.
What’s On the Agenda for This Week?
Other than Wednesday’s Retail Sales report, there are no major economic releases that have the gravitas to move MBS higher. The Treasury auctions this week will need to be closely watched but they are also unlikely to break us out of the channel. There will also be the monthly bond rollover to contend with.
MBS Overview
While last week saw a lot of volatility (-107 BPS from the intra-day high to intra-day low for the week), this week will be very key as to the near term trend for rates. Are we in a “v” shape rebound off of the 200 day moving average? If so, MBS pricing will head to higher levels. Is last Friday’s rebound over played? If so, MBS will pull back into last week’s channel.
There will be a few reports that will give us a good understanding on inflation with Import Prices and PPI. But the biggest report of the week will be Wednesday’s Retail Sales data. Last time, we got a nice surprise to the upside with a reading of +0.9%. The stronger this report is…the worse it is for pricing.
There is a big chunk of new debt to absorb with some long-term Treasury auctions this week:
- 05/12 3 year note
- 05/13 10 year note
- 05/14 30 year bond
Across the Pond
China: The People’s Bank of China (PBOC) announced their third rate cut in six months by 25 BPS. They also lifted the ceiling of deposit rate from 1.3 times to 1.5 times. Clearly, this is meant to stimulate an economy that is not growing at a fast enough clip.
Greece is the Word: And we are seeing a new term being floated around “accidental default.” They have a 750 million euro payment due this Tuesday. The Eurogroup is currently meeting and there is very little chance that they will give Greece any new cash without major concessions from Greece, which we simply haven’t seen yet. There may be an interim solution…the IMF may push back the payment date but Germany is essentially saying they are ok with Greece getting “das boot.”