Capital Markets Update for the Week of June 28th

Treasuries pulled back on Friday and the MBS basis ended the day wider, which means rates moved higher. Why? The Fed’s favorite inflation measure, the PCE deflator, continues to climb. It picked up to 3.9 percent year over year in May from 3.6 percent, while the core gauge, excluding food and energy, jumped 3.4 percent, the biggest advance since 1991. Still, Fed presidents played down the data. Minneapolis Fed President Kashkari cited the recent decline in lumber costs in predicting that spikes will “return down to normal,” while Boston Fed President Rosengren said that he doesn’t expect higher inflation to continue next year and that it is time to think about how quickly accommodation should be removed. Separately, the final June reading for the University of Michigan Index of Consumer Sentiment slipped from the preliminary reading, but was still up from May, driven by households with incomes above $100k and their view of future economic prospects.

This week’s economic calendar sees miscellaneous news concluding with the June employment report on Friday (which also is an early close in advance of the Independence Day weekend). Today’s calendar is light on data with just Dallas Fed Texas manufacturing for June due out later this morning. Three Fed speakers are also scheduled, starting with New York’s Williams, followed by Philadelphia’s Harker, and Fed Vice Chair of Supervision Quarles. Speaking of the Fed, the Desk released a new MBS purchase schedule Friday afternoon that covers the June 28 to July 14 period, which averages $4.5 billion per day, as expected. There are no changes to the coupons versus the prior schedule with UMBS30 and GNII operations targeting 2 percent and 2.5 percent while it is 1.5 percent and 2 percent in UMBS15s. Today’s schedule sees the Desk targeting a maximum of $5.2 billion 30-year 2 percent and 2.5 percent. We start the week with Agency MBS prices better/up nearly .125 and the 10-year yielding 1.50 after closing last week at 1.54 percent.

Commentary by Rob Chrisman