Happy Cinco De Mayo!
What's on the agenda for this week?
MBS OVERVIEW
This is a much lighter week for economic data compared to
last week's schedule but there are still some very important releases.
We have a large supply of 10 year and 30 year Treasuries
that will be auctioned off as well as a lot of "talking Fed's" this
week with Fed Chair Janet Yellen testifying before Congress Tuesday and
Wednesday. We will also hear from Evens, Stein, Tarullo and Bullard.
We have just a few economic reports that have the gravitas
to actually move pricing. These include ISM Servicing, Non-Farm Productivity
and Wholesale Inventories.
But once again....the "Teflon Bond Market" is all
about overseas.
Across the pond: Shockingly, Russia and Ukraine did not
magically become friends over the weekend and this will continue to provide
fantastic support for your pricing. This morning, MBS are up even more due to
weaker than expected economic data out of China.
TODAY'S EVENTS
ISM Non-Manufacturing (Servicing): The servicing sector
(what you and I do) account for 2/3 of our economy. This report was better than
expected (55.2 vs est of 54.1) and is the best reading since August. This is
the type of data that can really hurt MBS pricing. It has moved pricing off of
our early morning highs but international concern is simply providing too much
support.
MBS OVERVIEW -LEARN FROM THE PAST
Mortgage backed securities (MBS) gained +46 basis points
(BPS) from last Friday's close which caused 30 year fixed mortgage rates to
move lower from the prior week. The market saw the lowest rates on Friday and
the highest rates on Tuesday.
As a refresher for you - when the economy and labor market
expands, long term bonds suffer which is why you see interest rates rise when
you see strong economic growth. And that is perfectly natural. You can't have a
growing economy AND low rates at the same time under normal circumstances. But
that is exactly what we have right now. Last week's economic data was very,
very strong.
On the housing front, Pending Home Sales were better than
expected (+3.4% vs estimates of +1.0%), and the Case-Shiller Home Price Index
showed a 12.9% gain in home prices over the past year. On the labor front, ADP
Private Payrolls were better than expected (220K vs estimates for 210K) and the
Non-Farm Payrolls was much stronger than market forecasts (288K vs estimates
for 210K) plus the past two months were revised upward. The Unemployment Rate
dropped to 6.3% but this was largely due to the participation rate dropping as
close to 1 million people said that they were not looking for work any longer.
On the manufacturing front, Chicago PMI was very robust
(63.0 vs est of 56.7), and ISM Manufacturing was hot with a reading of 54.9 (vs
estimates of 54.3). Our first look at the 1st QTR GDP was disappointing but
this number will be revised two more times and the market is largely discounting
the report due to the horrible weather that we had during that period.
The Federal Reserve Open Market Committee voted to reduce
their monthly Treasury and Agency mortgage backed securities further..so that
means less demand and less support for long term bonds.
So....all of the above makes a wonderful text-book case for
a huge sell off in bonds and therefore a big run up in rates. But that is not
what happened. Why?
This is because of all of the headlines out of the
Ukraine/Russia conflict. Headlines of pro-Russian "civilian" forces
capturing administrative buildings, taking hostages, shooting down helicopters
and our weak sanctions against Russia are doing nothing to deter them. This has
foreign money flocking to U.S. bonds which is driving up demand and
therefore.....driving down interest rates.
No comments:
Post a Comment