What happened last week?
Mortgage backed securities (MBS) lost 4 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move sideways from the prior week.
It was a very light week for economic data with just a few reports that had the ability to move the bond market. With MBS just moving -4BPS for the entire week, it’s clear that last week’s economic data did nothing to help rates.
There were three very successful U.S. Treasury auctions (3, 10 and 30 year) but they had no impact on pricing. There were several “Talking Feds” and the overall theme was that they saw a real possibility of a rate hike in June/July if the data continues to trend upward but the markets still have a very low probability priced in.
The Consumer was in the spotlight and looked very good.
Retail Sales
The top of the pyramid – everything flows down from the top. If Retail Sales are higher then more goods need to be ordered, they need to be produced, people need to be hired to produce and sell them…yada, yada, yada. So, it was great news that the April Retail Sales data surprised to the upside with a very strong MOM (month over month) reading of 1.3% vs expectations of 0.8% and a big reversal from March’s -0.3% rate. Ex-Autos, Retail Sales jumped 0.8% which was almost double the market expectations of 0.5%.
Consumer Sentiment: Surprised to the upside but makes sense given the strong Retail Sales data. The preliminary May reading hit 95.8 vs estimates of 91.
But it wasn’t just consumers that were more upbeat….Business also improved their outlook as the April NFIB Small Business Optimism Index was better than expected (93.6 vs estimates of 93.2) and ended a run of declines that hit a 2 year low in March. Five out of the 10 components increased, 4 were unchanged and 1 decreased. Looks like they are continuing to struggle with a tight labor pool as the biggest jump was in the job openings hard to fill category.
What’s on the agenda for this week?
The Big 3
The items that have the greatest potential to impact pricing this week are: (1) The Talking Fed, (2) Oil and (3) CPI.
(1) The Talking Fed: The FOMC minutes will get the most attention but after last week’s string of “hawkish” comments from voting members, it will be interesting to see if that trend carries through this week or if (as usual) we get a bunch of contradictory “dovish” comments.
05-16 Neel Kashkari
05-17 John Williams, Robert Kaplan, Dennis Lockhart
05-18 Atlanta Fed Business Inflation, Minutes from the last FOMC Meeting
05-19 William Dudley
(2) Oil: WTI is trending upward on growing Nigerian oil output disruptions. Last week is was Canadian wild fires (briefly). It’s clear that it’s all supply for the market right now. If there is another source of disruption, we could see oil make a move towards $50 and that could weigh on pricing.
(3) Inflation? There was an increase in PPI but it was not significant. This week will be CPI and the bond market will be paying close attention to the YOY Core data which has been trending above 2.0%. If it moves north of 2.3%, that would be negative for pricing.
Domestic Flavor
Housing: There are several doses of housing data this week which include Home Builders’ Sentiment, New Housing Starts, Building Permits and the most important piece of data – Existing Home Sales. None of these reports will influence pricing this week but will give a good idea of the health of our housing market.
Across the Pond
China: Their Retail Sales improved by 10.1%..Wow! But the market thinks it’s a weak number because they had forecast 10.5%. Same story with Industrial Production which jumped 6.0% but the market was expecting 6.5%.
Market Wrap-up
Overview
As expected, MBS lost some steam today and it was solely due to rising Oil prices. The two saving graces were that the 25 day moving average continued to provide some very nice and heady support, and while Oil increased to a 6 month high…it couldn’t close above $48. If it did, the sell-off would have been much more pronounced.
For the week, there is terrific support due to concerns over the possible UK exit from the European Union (“Brexit”) so the downside is limited (but it is certainly there). The upside is even more limited as any gains will take us too close to the “Danger Zone.”
Domestic Flavor
Manufacturing: The Empire (NY) Manufacturing Index dropped back into the red as it fell from a nice reading in April of 9.56 down to May’s -9.02 which was well below the estimates of +7.0. This regional report is not a bellwether for other manufacturing data and is largely ignored by bond traders (it’s just a really slow news day today).
Housing: The NAHB Sentiment Index remained at 58 where it has been for the past four months. Anything above 50 is positive.
On Deck for Tomorrow: CPI, Housing Starts, Building Permits, Industrial Production and Cap Utilization