Matt Graham, Founder and CEO, MBS Live
[Matt] This is Matt Graham with the MBS Live Market Update. Last week was an interesting one for the bond market. Not quite as high in terms of volatility as two weeks ago, when we had a CPI pushing back against the jobs report from the week before that, but things definitely began to happen and were markedly more volatile than the previous holiday shortened week. Things really got interesting on Wednesday and especially on Friday. Let’s talk about the reasons. The week began in a fairly boring fashion, falling right in line with the previous week’s trend. There wasn’t much by way of significant economic data and the data that may have been market moving didn’t come in very far from forecast of those reports, it would probably really only be consumer confidence that would be considered a market mover. And it came in right in line with forecasts. Other than that, we had fed speakers and the fed is really hard pressed to say anything new and different recently, most fed speeches sound like reworded versions of one another, not a big surprise to the financial market and then we had a treasury auctions, but as of Tuesday, we were only up to a two year treasury auction, and that is not as relevant for the part of the bond market that impacts mortgage rates as the auctions later in the week, even then the auctions later in the week didn’t have much of an impact because they all came in fairly close to expectations and their bid to cover ratios we’re a little bit stronger than they had been, but not so much so that it drove a significant amount of bond buying in the wake of the auction results. What really mattered seemed to be overseas events and political events. Overseas events would focus on a couple of different things. One would be the Japanese Yen currency. I don’t know if you’d call it a crisis, but levels have gotten very, very weak. And in the past, when Yen has been as weak as it is now, we have tended to see, or the bond market has at least tended to worry about official level selling, meaning that Japan is selling treasuries in order to make money by yen denominated assets and sort of backstop the slide in yen valuation, this time around, that’s such a well understood and well documented phenomenon that some people worry there is speculation fueling the volatility and that we’re not seeing as much actual official level selling, but rather speculative selling and that’s increasing volatility. We also have election related drama in France, and that volatility in European bond markets spilled over to U.S bond markets, all told between Europe and Japan. That was given quite a lot of credit for some weakness seen on Wednesday as 10-year yields moved up to the highest levels in a couple weeks. Things didn’t really get super interesting for the bond market, though until Friday the biggest piece of economic data of the week. Came out at 8 30 AM. That is PCE, the PCE price index, the close cousin of the CPI consumer price index. That is probably the biggest market mover in terms of scheduled economic data. PCE is actually a more preferred metric as far as the Fed is concerned when it comes to assessing our progress toward the 2% annual inflation target. We’re still at 2.6%, which is right in line with forecasts, but the month over month reading was 0.1 and before it was rounded, it was even a little bit lower than that and annualizing a reading like that gives us an inflation level well below the 2% target. Bonds aren’t rallying aggressively on that because it takes more than just one month. It takes 12 actually of similar readings to be below the 2% target. So traders are waiting for confirmation from additional data. Perhaps most importantly, this is data for the same month that we already got from CPI several weeks ago. So it wasn’t really a surprise to see PCE also indicating that the month of May had a good low core inflation reading and also, the last counterpoint is that it still isn’t showing shelter based or housing based inflation falling at a pace that is going to help CPI do its thing when it comes to core year over year inflation. Then the weird stuff started happening after the rally on Friday morning, following the PCE data only about 90 minutes later, the bond market started selling off rather aggressively, I might add, and the only explanation that we were left with at the time, and really it was, just by process of elimination would be that we had month and quarter end trading which never carries a direct implication for the direction it’s going to move bonds, but it’s always a threat when it comes to sort of non data driven, non event driven volatility in the bond market to make a long story short, there can be certain compulsory trades that need to happen by the end of any given month. Traders can make them earlier a couple of days in advance of the month end deadline or right up until the month end deadline. And we saw a little bit of everything this week. Some people speculated this actually increased the selling pressure back on Wednesday and, uh, it was widely credited for the counterintuitive selling Wednesday afternoon. And, I’m sorry, Wednesday morning. And then again, the probably pretty logical selling on Wednesday afternoon, considering volume spiked and, bond sales spiked right in line with the 4PM cutoff time for some of the traders that make their month end trades. Then in the overnight session and early Monday morning, we had more weakness to start the new week, and this brings another counterintuitive move after this morning’s ISM data, which was good for bonds. If you looked at the data in and of itself, bonds rallied for a split second, and then got back to the business of selling and that’s at that point, we need to bring politics into the discussion and entertain the possibility that markets are entertaining the possibility of a GOP sweep later this year and to leave any partisan politics out of this conversation, which I’m always a fan of doing, I will say that when 1 party, whether it’s a red or a blue party controls everything, then that is typically perceived as bad for the balance of revenue versus Treasury issuance and thus bad for interest rates. So that is a little bit of the speculation that is fueling the counterintuitive weakness that we’re seeing after this morning’s economic data. Looking ahead, it’s a very, very action packed week for data, and it culminates in Friday’s jobs report, which is 1 of, if not the biggest market mover on any given month, along with the consumer price index, which comes out next week. That’s all for this week back to you.