“Why don't you tell rumors in a Botox Clinic? Nobody raises an eyebrow.” While I head to San Diego today, who can keep track of the rumors out there, like a combo of a well-known real estate search engine and a Top 10 retail lender? (Totally unsubstantiated, unlike the actual Luminate/NJ Lenders news below!) Who can keep track of thousands of products from hundreds of countries to tax them? In yet another change, smartphones, computers, and other electronics are exempt from Trump’s reciprocal tariffs, for now. It’s difficult hedging a mortgage pipeline; try being a purchasing manager for a car maker! Or a homebuyer or builder: Canada and Mexico, respectively, are important sources of softwood lumber and gypsum (used in drywall). China is an important source of steel and aluminum, as well as a supplier of home appliances and other products used in residential construction. Many of the raw materials and goods sourced from China are already subject to tariffs. It is important to note that Canada, Mexico, and China are the United States’ three largest trading partners. Economists at the National Association of Home Builders (NAHB) project that the proposed new tariffs on Mexico and Canada, along with the recently imposed tariffs on China, could raise the cost of imported construction materials by more than $3 billion. (Today’s podcast can be found here and this week’s are sponsored by BeSmartee, transforming mortgage lending with Bright Connect, its native mobile app designed to boost loan officer productivity, speed up referrals, and simplify the borrower experience. Hear an interview with TrustEngine’s Dave Savage on the evolution of the industry since he entered more than three decades ago, how he's driven to make an impact, and more tidbits from one of the most recognizable names in mortgage that you won’t want to miss.)
Investors have taken a step back in an effort to allow trade war dust to settle and markets to stabilize before establishing or adding to positions, with yields on (usually steady) U.S. government bonds having spiked sharply, a signal that President Trump’s trade war has shaken faith in the U.S. economy. Trading activity hasn’t subsided, but rather there is a collective unwillingness by traders to take sharp repricings on the chin. Treasuries are trading like a risky asset, or at least closer to the debt of an emerging-market country than what one would expect given the circumstances. Case in point: investors dumped 10-year and 30-year Treasuries at the same time they dumped stocks, crypto, and other risky assets over the past two weeks. The inverse is also true, with Treasury prices rising in unison with these other asset classes.
It’s okay to have some nerves when you (read: your country, your president, his administration) pick a fight with a country (China) that owns a lot of your debt instruments. China’s holdings of Treasuries are increasingly under scrutiny as some analysts have postulated that the country could dump U.S. debt in the future as a response to the steepest American tariffs in a century. There are also (unsubstantiated) whispers that sales by Beijing may have already helped fuel the biggest surge in 30-year yields since the pandemic.
If, in fact, the move did have its origins from overseas, fingers crossed that the 60-basis points selloff likely represents the extent of such influence. There also exists a separate narrative that it was a dash-for-cash (a la the pandemic) that triggered further position unwinds at a moment in which uncertainty was peaking. 10-year and 30-year U.S. Treasury auctions last week went remarkably well, all things considered, although those weren’t enough to materially offset general selling pressures in the market.
If it wasn’t clear from the above two paragraphs, last week’s economic data was overshadowed by trade policy as President Trump launched the U.S. into a higher tariff environment. Price pressures remain as uncertainty around trade negotiations continue. Markets received a welcome surprise when March’s inflation data came in much softer than expected with the consumer price index (CPI) falling 0.1 percent from February. The data takes some of the pressure off the Fed to remain overly hawkish if the labor market experiences a downturn although expectations are for the Committee to keep monetary policy unchanged following its May meeting. The Fed is likely in a wait and see pattern until economic conditions force their hand one way or the other. Sure, chatter about some form of intervention from the Fed should the weakness continue has gained momentum. However, recent chatter from Fed members paints consensus thought of one signaling that the current modestly restrictive policy stance remains entirely appropriate.
Put another way, don’t hold your breath that U.S. rates are data dependent. Instead, expect that upcoming releases (e.g., retail sales due out later this week) will provide an incremental trading impulse while the broader tone will ultimately be a function of sentiment surrounding news emanating from Washington D.C., at least as it relates to the impact of the trade war on consumer confidence. And make no bones about it, the U.S. economy is "facing considerable turbulence” as it navigates global trade wars, persistent inflation, the climbing budget deficit, and high asset prices. Your takeaway after reading the above should be that this all-out assault on global trade has brought into question Treasuries status as a safe bet, which does not bode well for mortgage-backed securities (MBS).
Aside from benign consumer and producer price inflation readings last week, we did receive the preliminary April University of Michigan Index of Consumer Sentiment on Friday, which not only posted the second-lowest reading on record but also showed that the decline in consumer sentiment is broad-based. So, stop reading now if you don’t like bad news. There were steep declines in both current conditions and future expectations, one-year inflation expectations surged to 6.7 percent (the highest since 1981) while long-term expectations rose to 4.4 percent (the highest since 1991), and expectations for unemployment to rise are at the highest level since 2009.
The report fomented concerns about future consumer spending strength and highlighted growing fears of a recession, signaling increasing economic anxiety and waning consumer confidence. Fed Chair Powell has downplayed the importance of the survey-based measures of inflation expectations of late, which is a shift from the Fed’s traditional stance, but one that is understandable in the context of the recent volatility. Let’s hope that equities stabilize, and President Trump’s social media posts don’t reveal any new levies or trade restrictions.
This week’s key data includes Fed surveys, import prices, retail sales, industrial production/capacity utilization, business inventories, and housing data. Fed Chair Powell is scheduled to deliver remarks, while governors Bowman and Barr, and several Fed presidents, are scattered throughout the rest of the week. The ECB will be out with its latest monetary policy decision on Thursday, where another 25-basis point cut (to a 2.25 percent deposit rate) is fully priced in. Treasury supply will be headlined by $13 billion reopened 20-years and $25 billion new 5-year TIPS. The bond and equity markets are both closed on Good Friday and the bond market will close early on Thursday.
Bank earnings continue with Goldman Sachs scheduled to report today and Bank of America and Citigroup reporting tomorrow. In the world of MBS, besides Class B 48-hours today, Class C is on Wednesday. Today’s economic calendar is mostly about bill auctions, Fed speakers, and contains no notable data on the docket. We begin the holiday shortened week with Agency MBS prices better than Friday by about .125, the 2-year yielding 3.91, and the 10-year yielding 4.45 after closing last week at 4.49 percent (50-basis points higher than where it began the week).
Liam Neeson and the Easter bunny… what could go wrong?
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