Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS Live Market Update. Last week was fairly uneventful for the bond market and punctuated by Wednesday’s holiday closure. The week really didn’t begin in earnest until retail sales came out on Tuesday morning. The headline was only slightly weaker than expected at 0.1 versus 0.2, but the revision to the previous month was a bit bigger, knocking the 0.0 reading down to negative 0.2. The bond market cheered the news as it often does when the economy shows signs of weakness. And retail sales has been increasingly tradable. The 10-year treasury yield only moved down about four basis points in response, but then there was a mystery rally in the afternoon, not readily tieable to any overt headlines, economic reports, or other developments. When these sorts of things happen on the day before a holiday, we often think about things like positional trading considerations. IE traders closing out positions ahead of a holiday or a weekend. In this case, the closing of positions resulting in lower treasury yields would tend to suggest the closing of short positions and then the risk of reshorting on the following business day. Indeed, Thursday morning saw a little bit of mystery weakness. The data itself definitely didn’t suggest weaker treasury trading or bond trading in general, housing starts were quite a bit weaker than expected. Jobless claims were a little bit higher than expected and still very elevated compared to the recent range. The Philly Fed index was also a little bit weaker. Really the only objective piece of news that would have suggested weakness in the bond market would be the prices paid component of the Philly Fed index. Bottom line. There is a case to be made for position squaring on Tuesday and repositioning into some short trades on Thursday. Finally, on Friday, we got the week’s only other potentially significant data in the form of S& P Global’s PMIs. Not to be confused with the ISM PMI data that has long been the dominant PMI in the U.S. S&P used to be market with an eye and has been an up and coming market mover in the past few years. Most recently it is just as relevant as ISM PMI in many cases because it provides the first look at any given month of economic data because it comes out about two weeks before ISM PMI. Incidentally, it comes out two weeks before the final S&P PMI too, because there are actually two releases each month for S&P. This was June data. It was one of the first reports for the month of June, and in this case, the services sector was much stronger than expected. Strongest in more than two years, according to this report, and that pushed bond yields sharply higher, at least in a narrow range. In fact, it might not be appropriate to say sharply higher when treasury yields only rose from 4.22 to roughly 4.27. Those numbers should sound familiar because they were in play on Tuesday morning as well. And, with that in mind and all that having been said, does any of the movement seen last week, even matter in the bigger picture. The answer is not really. It all was contained in an excruciatingly narrow range in the bigger picture with every single trading day falling well inside the ranges established on just the last two days of last week. So where does that leave us now? Heading into the current week. There isn’t much more on the calendar with promise of causing volatility. One might assume that Friday’s PCE price index would be fairly relevant considering that’s the fed’s preferred gauge of its progress toward the 2 percent inflation target. But PCE historically has not been a significant market mover compared to something like CPI. We only see PCE have a big impact when it tells a different story than CPI and when the actual number falls pretty far from the forecast. In this case, the market’s looking for core PCE month over month to come in at 0.1 that might seem low, but recall that CPI came in at 0.163 before it was rounded up to 0.2. So, it is indeed a possibility and not some sort of diabolical set up by the financial market to create an erroneous weaker than expected reading and push rates higher regardless of Friday’s PC outcome. The biggest deal for rates in the bond market is next week’s slate of economic data. It’s a little bit of a weird one with Thursday being the 4th of July and then Friday morning being the jobs report. But other than that there’s the traditional lineup of early month econ data with ISM manufacturing, JOLTS, ADP, ISM non manufacturing, and of course the jobs report on Friday. That’s it for this week. Back to you.