What Happened Last Week?
Mortgage backed securities (MBS) gained 35 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to improve slightly.
It was a week of very slow gains as our domestic data weighed on pricing but international events provided terrific support and even some upper momentum.
Domestically, it was a very light economic calendar with no major Treasury auctions. Existing Home Sales were much stronger than expected and reached an eight year high. Weekly Jobless Claims fell to their lowest level since 1973. And the Leading Economic Indicators were three times stronger than market expectations. This wave of positive economic news provided pressure on pricing but this was more than offset by international events.
International Flavor: While the Chinese stock market continues to be a huge concern, we also got news that their PMI (manufacturing data) just hit a 15 month low. Greece remained front and center as two more votes were passed and they used their new bridge loan to make some payments back to the ECB and IMF. “Haircut” creditors having to take on Greek debt has the market worried that Germany will scuttle the deal and it is this fear that caused the upward movement in pricing for the week.
What’s on the Agenda for this Week?
Today’s economic data is negative for pricing due to China giving us a nice lift. MBS is expected to remain in the same channel as it has been for the past three weeks. This is not a trend reversal towards better rates but simply the top end of an ever undulating cycle that we have seen several times in the past three weeks. Any positive momentum out of the Greek negotiations will be negative for pricing.
Domestic Flavor
Unlike last week, this is a huge week for economic data with the focus on Wednesday’s FOMC meeting.
Durable Goods Orders were stronger than expected (3.4% vs estimates of 3.0%), and they also beat Ex-Transport to the upside (0.8% vs estimates of 0.5%). May’s data was revised slightly lower and this reading has been very volatile this year.
Wednesday’s FOMC Meeting will be key. The market is of the mindset that the Fed will wait until they have a meeting/press conference combination to announce their rate hike. Since this week’s meeting does not have a press conference, the thinking is that the first chance for them to raise rates is during the September meeting. But Janet Yellen made it very clear in her statements that just because there is or is not a press conference will not impact when the Fed makes a move. Regardless, the economy has not altered its course that led to 15 out of 17 Fed members to project a rate increase in 2015 at the last meeting and we are unlikely to get any new direction out of the Fed.
There will also be the 2nd quarter GDP, Consumer Confidence, Consumer Sentiment and Chicago PMI to round out the week. All have the gravitas to move pricing.
Treasury auctions this week:
07/28 2 year note
07/29 5 year note
07/30 7 year note
But it will be international events that will continue to drive long bond pricing this week. It is interesting that it’s one of the largest economies in the world (China) and one of the smallest (Greece) that are driving pricing.