I hope you had a great 4th of July weekend!
What Happened Last Week?
Greece has defaulted and voted to “stick it” to the IMF/ECB, etc. And the reaction by MBS? Well, we rallied but only to levels that we saw last Tuesday and they didn’t hold last Tuesday and they are not holding today as we have gone from a high this morning of +51BPS and have pulled back down to just +24BPS. So…the Greek implosion is not a trend reversal but it will help to give a little better pricing than Friday.
MBS Overview
Mortgage backed securities (MBS) gained 51 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve (move lower) from the prior week.
This was a holiday-shortened week with the bond market closed on Friday in observance of Independence Day.
Overall, the economic data did show positive momentum even though a few of the economic releases were lighter than market expectations.
The week started with a blockbuster Pending Home Sales report which hit its highest level in 9 years. That was then followed up with a red-hot Consumer Confidence report that had its best reading in 8 years.
On the manufacturing side, the national ISM Manufacturing report continued to show expansion with a reading of 53.5, which was slightly higher than market expectations. The Chicago PMI report was disappointing and just missed expectations (49.4 vs estimates of 50.0) but this report was glossed over by traders in favor of the larger scaled ISM report.
And that brings us to Jobs.
Jobs, Jobs, Jobs: Well we certainly had a mixed bag of jobs data on Thursday. Here is the breakdown for you:
– Non Farm Payrolls 223K vs estimates of 250K. Any reading between 200K and 250K is fine, but May was revised downward from 280K down to 254K.
– Non Farm Private Payrolls was also 223K vs estimates of 225K…so right on the money but May was revised downward from 262K to 250K.
– The average monthly job gains (NFP) for all of 2015 is now 208K. Not bad at all.
– The Unemployment Rate dropped from 5.5% down to 5.3%; the market expectations were for 5.4%.
Part of the reason for that drop in the Unemployment Rate was in fact more people going back to work but also it was due to a drop in the Participation Rate from 62.9% down to 62.6%.
The real key was the Average Hourly Earnings. There have been several other economic reports that have shown wage pressure but it didn’t show up in this one, as the Average Hourly Earnings were flat at 0.0% vs market expectations in the 0.1% to 0.3% range.
Now…what caused Average Hourly Wages to be flat? Why it’s the product mix, so to speak. You see we are trading full-time jobs for part-time jobs. Part Time Jobs jumped 161K but full-time jobs tumbled by 349K. Some of the reason for that is seasonality as we simply employ a lot of part-time summer workers; some of that is due to regulations which make it very unattractive for business owners to hire full-time employees and some of that is weakness in the labor force.
What’s on the Agenda for This Week?
The markets are emerging from a long weekend and reacting to the Greek referendum vote. But before we get into that, let’s address our domestic data for the week.
The two most important releases this week are today’s ISM Services report and Wednesday’s release of the minutes from the last Fed meeting.
There will be some Treasury auctions to absorb:
07/07 – 3 year note
07/08 – 10 year note
07/09 – 30 year bond
The “Talking Fed”: There will be a lot of Fed speak this week which is capped off with Janet Yellen on Friday:
07/08 – John Williams
07/09 – Narayana Kocherlakota, Lael Brainard, Ester George
07/10 – Eric Rosengren, Janet Yellen
Greece is the word: Maybe…it might have just moved from “THE” work to “A” word. Of course the story over the weekend is Sunday’s Greek referendum vote which overwhelmingly was in favor of rejecting the Troika’s deal. Greek Finance Minister Yanis Varoufakis has been booted and the market is awaiting to see who will be appointed to that post. Meanwhile, the Greek Prime Minister is on his way to present his new proposal to German Chancellor Merkel in an attempt to get her on board. But this is simply not the watershed moment that it would have been two years ago.
Afternoon Market Wrap-Up
MBS started out on a tear…jumping +51 BPS as the long bond market got its first chance to trade after Greece’s “NO” vote on Sunday. About half of that gain was lost on the strong ISM Services data and then resumed on an upward course later in the afternoon.
ISM Services: This report actually has more weight than Wednesday’s ISM Manufacturing report. Today’s ISM Services report represents 2/3 of our economy and it was a very strong report – coming in at 56.0 which was a small improvement over May’s data. Considering anything over 50 is expansionary, a reading of 56 is very good. MBS sold off as a result but concern over Greece helped to keep MBS in positive territory today.
Greece: What’s new? Well, after the Greek citizens rejected austerity and higher taxes as part of a new bailout plan proposed by the IMF and ECB along with all of the Eurogroup’s finance ministers. Greece shed one finance minister and named a new one today. They announced that Euclid Tsakalotos will be taking over the bankrupt nation’s finances.
Time for a Haircut: MBS rallied to their best levels of the day later in the afternoon in direct response to the ECB’s decision to keep the ELA (emergency liquidity assistance) at their current levels. This means no more new cash to funnel into Greek banks to meet the needs of all those people getting their money out. In addition, they put larger “haircuts” on collateral accepted by ECB from ELA.
Tomorrow will be JOLTS, Trade Balance, Consumer Credit and a 3 year Treasury auction. Tomorrow is also supposed to be the day where the Greek Prime Minister presents his new proposal.