After making little to no ground during the holiday shortened work week, mortgage backed securities are still in search of clear direction. Last week MBS closed at the same level at which they opened on Monday, even a very poor Employment Situation report was unable to increase demand for "rate sheet influential" MBS coupons. To remind readers, as MBS move higher in price, mortgage rates move lower. Following the release of the employment situation report on Thursday, MBS did manage to gain some ground but eventually gave back early morning gains as market participants made for an early exit ahead of the three day weekend. Matt and AQ inform me that MBS are battling a very unclear economic picture which is prohibiting prices from moving higher. The week ahead is very light on economic reports with the highest impacting events to come from Treasury auctions throughout the week.
Today we get one piece of data, the Institute of Supply Management(ISM) non-manufacturing survey which measures the strength of the non-manufacturing sector of our economy. Readings above 50 indicate growth while readings below 50 indicate contraction. The last 3 surveys have each come in better than the prior one; however, last month’s report missed expectations to the low side coming in at 44.0 for May. Economists surveyed were expecting June’s report to come in at 46.7 but the release has indicated a better than expected reading at 47.0, continuing the trend of improvement within the non manufacturing sector of the economy. Following the release, there was little reaction from the markets.
- The first of three Treasury auctions for the week. At 1pm the Treasury Department will auction $35 billion 3 year notes. The added supply of debt on the market will apply pressure on treasury yields to move higher to attract bidders. For the auction to be viewed as a success, we look for high demand from indirect(foreign) bidders. The last auctions that took place 2 weeks ago, saw well above average demand from these accounts. It will be very difficult for MBS to move higher unless Treasuries can move lower in yield and with more and more supply coming this is becoming more difficult.
- At 700am, The Mortgage Bankers’ Association Application Index. This data set tracks the increase or decrease in purchase and refinance activity at major lenders. The recent spike in rates has had a greater impact on the refinance activity but last week’s report showed both refinance and purchase activity declining. The purchase activity posted a 4.5% decline while the refinance activity dropped 30 %.
- The second treasury auction for the week takes place at 1pm. The Treasury will auction $19billion 10 year notes. Since the average life of a mortgage is between 5-10 years, this auction is more relevant to MBS than the 3 year auction. Market participants will be looking at the indirect demand data to gauge the auction’s success. Strong demand would be positive for MBS and lower mortgage rates.
- Weekly jobless claims which totals the number of Americans that filed for first time unemployment benefits for the prior week. Last week’s report showed that claims fell 16,000 to 614,000 and expectations call for this week’s report to indicate 610,000 first time claims. An increasing trend in unemployment claims points to a weak labor market which would lead to less consumer spending. If you do not have a job, you are much more likely to put off buying any unnecessary items. So, MBS tend to benefit with a higher than expected reading. As part of this report we also get continuing claims which totals the number of Americans that continue to file for benefits due to lack of finding employment. Last week’s report showed a decline of 53,000 to 6.702 million.
- The last treasury auction for the week will take place at 1pm. The Treasury will auction $11billion 30 year bonds. When our government does not have the cash to pay for spending, they issue treasury bills, notes and bonds to borrow the money. A treasury bill has a term of less than 2 years, a treasury note has a term of 2 to 10 years and a treasury bond has a term of greater than 10 years.
- International Trade which measures the difference between what we import into our country and what we export to other countries. Expectations call for the trade balance to be at $-28.8billion following last month’s $-29.2billion gap. The biggest impact to MBS from this report is the potential impact of importing inflation. A smaller trade gap would be a sign of a stronger dollar which makes import prices like the price of oil decline.
- Import and Export prices which gives a measure on inflation. The biggest enemy to mortgage rates is inflation as it eats away at the fixed return to the end investor. Your mortgage is a debt to you, but it is an investment to someone else. Last month’s report indicated that month over month, export prices increased by 0.6% while import prices increased by 1.3%. The main driving force behind the increase in import prices has been the run up in oil prices. Year over year, export prices posted a 6.5% decline while import prices fell a whopping 17.6%. Any report showing signs of inflation is negative for MBS and can result in higher mortgage rates.
- The Reuter’s/University of Michigan’s Consumer sentiment index which is a survey of 500 households on their personal financial conditions and attitudes about the economy. A more optimistic consumer is much more likely to spend while a pessimistic consumer is more likely to save. Since our economy is driven by consumer spending, the stock market generally rallies with a better than expected reading while MBS generally benefit with a lower reading. Over the last 4 month’s this report has shown sentiment to be increasing and economists’ surveyed are expecting that trend to continue with a reading of 71.5 following last month’s 70.8.
- At 10a eastern, Treasury Secretary Tim Geithner will testify before the joint hearing of House Financial Services and Agriculture Committee on derivatives regulation. Anytime Mr. Geithner speaks, market participants will pay attention as his words can move all markets.