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Saturday’s: 9AM 1590 AM/97.9 FM KVTA
Sunday’s: 7AM K-EARTH 101 FM
MBS OVERVIEW
4:00 EST – Our benchmark FNMA MBS 6.00 April Coupon is up +5 BPS with 60 minutes left to trade.
Rosie the Riveter: The March ISM Manufacturing PMI contracted for the 5th straight month and hit levels we have not seen since the height of the pandemic driven slowdown. The headline reading was a miss at 44.3 vs. est. of 44.6. The manufacturing index dropped to 46.9 and new orders fell to 44.3
On Deck for Tomorrow: Reserve Bank of Australia Interest Rate Decision, Factory Orders and JOLTS.
OPEC+ announced it will cut output by 1 million barrels a day sending crude price up $5.00, the initial reaction pushed yields higher on concerns of inflation creep. At 10 am ET March ISM and PMI manufacturing declined, and interest rates began to improve leaving traders considering inflation declining or increasing. The 10-yield dropped to 3.40% from 3.50% at 9:30 am.
The ISM index was 1.4% lower than in Feb, down 4 consecutive months and the index the lowest since May 2020, when it registered 43.5 percent. The New Orders Index remained in contraction territory at 44.3 percent, 2.7 percentage points lower than the figure of 47 percent recorded in February. The Production Index reading of 47.8 percent is a 0.5-percentage point increase compared to February’s figure of 47.3 percent. The Prices Index registered 49.2 percent, down 2.1 percentage points compared to the February figure of 51.3 percent. The Backlog of Orders Index registered 43.9 percent, 1.2 percentage points lower than the February reading of 45.1 percent. The Employment Index continued in contraction territory, registering 46.9 percent. Manufacturing has been slowing now for three months and is seen on any index, Richmond Fed, NY Empire State, Dallas Fed, and Philadelphia Fed.
The Supplier Deliveries Index figure of 44.8 percent is 0.4 percentage point lower than the 45.2 percent recorded in February; this is the index’s lowest reading since March 2009 (43.2 percent). The Inventories Index dropped into contraction at 47.5 percent, 2.6 percentage points lower than the February reading of 50.1 percent. The New Export Orders Index reading of 47.6 percent is 2.3 percentage points lower than February’s figure of 49.9 percent. The Imports Index continued in contraction territory at 47.9 percent, 2 percentage points below the 49.9 percent reported in February.
The weakness implies inflation isn’t going to increase much, the increase in oil prices implies the opposite. Once again, the 10 yield fell to 3.40%, the level that has stopped any improvement for over 4 months. Recently, since the FOMC meeting, markets divided that the Fed will pause, or increase. Today either side of the discussion can call it a winner. Some investors talking a 50 bp cut in the Ff rate by year end; don’t bet your money on it either way, year-end is a long way away.
Federal Reserve Bank of St. Louis President James Bullard said the OPEC cut would make the Fed’s job of lowering inflation more difficult. “This was a surprise,” he said. “Whether it will have a lasting impact I think is an open question.” “Oil prices fluctuate around. It’s hard to track exactly. Some of that might feed into inflation and make our job a little bit more difficult,” “I would’ve expected somewhat higher oil prices anyway with China coming back sooner than expected during the first half of 2023 and with Europe skirting recession,” he said. “And strong data in the US, all of those are pretty bullish factors for the oil market.”
Tomorrow Feb factory orders and JOLTS job openings; factory orders expected to have declined 1.4% after declining 1.6% in Jan; another report evidencing slowing manufacturing. The Feb JOLTS job openings get attention, although I don’t see why, the number of openings in the millions doesn’t equate as a measurement of employment, expected at 10.4 mil from 10.824 mil in Jan.
The 10 at strong long-term resistance at 3.42%; how much risk is worth taking that tomorrow the rates will fall below 3.40%. Most all our near term technicals are positive but facing the brick wall; we will hold a few rate locks over night given the price gains after morning prices were set.
MBS OVERVIEW
Three Things: These are the three areas that have the greatest ability to impact your backend pricing this week: 1) Jobs, Jobs, Jobs. 2) The Talking Fed and 3) Across the Pond.
1) Jobs, Jobs, Jobs: We get a ton of job and wage related data this week that culminates in Big Jobs Friday. The overall strength of the labor market along with wage pressures (or lack thereof) can have a very large impact on backend pricing.
2) The Talking Fed: The long bond market will continue to focus heavily on the Federal Reserve and their rate hike path and will continue to hedge based upon those expectations. This week we will hear from Bullard, Cook, Mester.
3) Across the Pond: Concern over the European banking crisis, OPEC, and interest rate decisions from Australia and New Zealand will be in focus.
Q2 begins. The news overnight, OPEC will cut 1 mil barrels a day has rocked the energy markets, crude at 8:30 am ET +$4.60 to $80.30. The reaction in the rate markets, the 10 yr note increased 5 bps to 3.52%, MBS prices in early trading 22 bps lower than Friday’s close. Initial talk from energy market traders, crude could hit $100.00 by the end of this year. Until now OPEC+ was assuring it would hold output steady. The immediate outlook is an increase in inflation that now the Fed will have to work into its decisions. The Saudis will cut 500K, half of the total.
The surprise oil cuts are adding another layer to the cake about the potential increase in inflation. Recently inflation has continued to work lower month by month, now the question takes on another twist, if $100.00/barrel occurs all prices will increase, whether at the pump or at the grocery store. Will central banks be dragged into more rate increases? Until yesterday the debate between 25 bps and no increase at the may meeting was evenly balanced, half saying yes, the other half, no. One additional consideration tossed into the mix. The higher energy prices will be a drag on economies, central banks must balance higher rates to squash inflation or standing down to keep the economies moving forward. Expect opinions to develop through the week.
This is employment week, manufacturing, and service sector indexes.
At 9:30 am the DJIA opened +113, NASDAQ -76, S&P -5. 10 yr 3.50% +3 bps. FNMA 5.5 30 yr coupon -17 bps and +7 bp frm 9:30 am Friday; the 6.0 coupon -9 bps and +21 bps frm 9:30 am Friday.
At 9:45 am PMI manufacturing in March 49.2 against 49.3 forecasts.
At 10 am March ISM manufacturing index expected 47.5, as reported the index dropped to 46.3.
This Week’s Calendar:
9:45 am March PMI manufacturing index (49.3, as reported 49.2)
10 am March ISM manufacturing (47.5, as reported 46.3)
Feb construction spending (0.0%, as reported -0.1%)
10 am Feb factory orders (-0.4%)
Feb JOLTS job openings (10.4 mil frm 10.824 mil)
7 am weekly MBA mortgage apps
8:15 am March ADP private jobs (+200K frm 240K in Feb)
8:30 am Feb US trade deficit (-$68.7B)
10 am March ISM services sector index (54.4 frm 55.1)
8:30 am weekly jobless claims (201K frm 198K)
8:30 am March employment data (NFP jobs 240K frm 311K, private jobs +215K frm 265K, unemployed 3.6% unch, average hourly earnings +0.3% frm +0.2%, yr/yr 4.3% frm 4.6%, Labor participation 62.5% unch).
