Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS Live Market Update. It was a wild and interesting week for the bond market last week, for a variety of reasons, lots of moving pieces, lots of back and forth, and even some counterintuitive movement. Started off on Monday, with that being the first day of the new month, that can sometimes bring in its own trading momentum for reasons that transcend scheduled economic data and events. This may have been the case to some extent. Recall that at the end of the previous week, bonds had started to come down after spiking into Tuesday, and that was potentially a result of working through Treasury auction supply and getting through end of month trading, new month trading was definitely benefited by ISM manufacturing, one of two reports put out by the Institute for Supply Management, and this one came In just a little bit weaker than expected, but the prices paid component also fell. That increased the chatter, if you will, in the marketplace regarding a potential shift in economic momentum seemed to be a bit overdone based on the report in question, but nonetheless, that was a buzz, and it helped kick the week off with sharply stronger trading levels in the bond market. Good Times kept rolling on Tuesday, with jolts job openings and labor turnover survey coming in weaker than expected and at the weakest levels since 2021 keep in mind, though, that job openings lag the non-farm payrolls number by about a month. The job openings data in this case was for the month of April, whereas the NFP non-farm payrolls and the big jobs report that followed two days later was for the month of May. Nonetheless, jolts has been a tradable report for the bond market for the past year or so, and has increasingly been mentioned by the Fed as one more place they’re going to look to see potential signs of labor market softening. As to whether or not Tuesday’s weakness was a sign of softening is a matter of debate. I think that, in general, we’re just returning toward pre pandemic levels and not necessarily showing new signs of weakness, but that remains to be seen, because the trend is in motion. So, it really depends where it stops, and not really where we are right now. The following day, Wednesday, is when things got more interesting. We had the other ism PMI, this time in the services sector, and it was stronger than expected, with the bond market tending to react much more readily to the services, PMI, it would not have been a surprise to see yields spike on that news, and indeed they did spike fairly logically, I might add. But the spike was only temporary. It ended up looking like a blip in the bigger picture, as yields continued to trend down toward their lowest levels the week, ultimately hitting those levels in fairly uneventful trading on Thursday, amid the week’s biggest lack of big-ticket economic data, some of the paralysis or the sideways grind may have been in anticipation of Friday’s jobs report. This is no longer probably the biggest economic report of any given month, although, if you had to pick one report over the past several decades, that would be it. But in the recent environment, CPI, the Consumer Price Index, is generally the bigger deal. Nonetheless, NFP, non-farm payrolls is a close second, and in last week’s case, it’s a prize to the upside in a big way, coming in at 270 2k versus a 180 5k forecast. Offsetting that, to some extent, the unemployment rate ticked up to 4% from 3.9 but NFP is the headline component of the report, and the part of the data that most readily moves markets. With that, yields skyrocketed relatively from just under 4.3 to roughly 4.45 right after the data, they drifted slightly higher for the rest of the day, and that brings us into the current week at 4.47 and change. And from here, we wait for even more important data and events, most notably on Wednesday, with CPI 8:30am so this is the consumer price index, the biggest piece of economic data, as far as the bond market’s concerned, on any given month, it had been elevated in q1 and started to show perhaps a little bit of traction back in a lower direction last month, and now we’re hoping to see that continue, assuming we’re hoping to see rates move lower, the forecast is still calling for 0.3 at the core level. And if that were to be achieved, it should be. Are good for bonds, all other things being equal, but a reading of 0.1 or 0.2 if such a thing can manage to occur, would really go a long way toward instilling confidence on the part of the Fed that they’ve seen the disinflation needed to cut rates in any event, we’ll hear from them only a few hours after the report, and that’s part of the thing that makes this week so particularly interesting is that Wednesday afternoon brings the next Fed announcement, as well as one of the periodic dot plots in the summary of economic projections, we can assume likely that the dots will be a little bit less friendly than they were last time due to the inflation data that’s transpired since then, but a lot of that depends on how CPI comes in that morning. So, a lot at stake, a lot of interesting information to find out. A lot to be gleaned about where we stand with respect to rate cut prospects heading into the rest of the year. That’s going to do it for this week. Back to you.