The two biggest events driving the market this week are the Friday jobs report for July and the ongoing saga of the stimulus bill. The jobs report will be the first in a few months to have the potential to alter perceptions and trading direction. If the report beats expectations (1.5 million new jobs), the selling in Treasuries may be tempered by the fact virus cases continued to spike after the survey week, which is the second week of the month, and by the diminished outlook for the stimulus bill. If the report misses then the rally in Treasuries is likely to get boosted by the two factors noted above. In any event, it will be a consequential report and with wide dispersion in estimates the ability to surprise will be strong. Last but not least, we’ve dropped another podcast this week. In this episode, we sat down with Kevin Scott, founder of ADDO Worldwide, and Neil Stevens, CEO of Oconee State Bank in Athens, Georgia. They discussed the importance of attracting young bankers into the ranks, and also the importance of investing in your bank’s younger leaders, and how to cast a vision that inspires both them and your entire bank. Give it a listen, and even better subscribe so you don’t miss any of our future episodes. The itunes link can be found here and the Spotify link here.
We talked above about the jobs report and the fate of the stimulus bill driving market direction this week, and into next week as well. The stimulus bill has turned into the political football we all knew it would and now you add the specter of the August recess this weekend to the calculus and the incentive to reach a deal is high. Most of the benefits in the first CARES Act have expired, namely the $600 per week unemployment supplement, and while the new Senate bill includes a renewal it’s a more meager $200 per week. Of course, getting from the $3.5 trillion House-passed bill to a Senate bill that is reportedly a more modest $1.0 trillion will require some real horse-trading skills. So enter Treasury Secretary Mnuchin and House Speaker Pelosi who met Monday and Tuesday and most likely today to hash out the must-have provisions in the House bill that the White House, and presumably Senate Republicans, can also agree to.
Mnuchin said after Monday’s meeting that the two sides “made a little bit of progress.” New York Senator Schumer said there were a lot of issues still outstanding, “but I think there is a desire to get something done as soon as we can.” Even if they reached a deal this week, it would likely take until next week before the Senate and House vote on it. And while Pelosi said on Monday a deal was possible this week, she was quick to add the Republicans haven’t offered any money for some top Democratic priorities: aid to state and local governments and funding for the November election and the U.S. Postal Service. Bowing to political realities, this is probably the last opportunity before the November election to pass major legislation so expect the Dems to stick to their guns on their must-haves, and Mitch McConnell will need plenty of Democratic votes to pass his measure in the Senate.
So, as the clock ticks the market has gone from expecting a deal, albeit modest, to now wondering even when that modest bill will get passed and provisions of it into the hands of consumers and small businesses. With the economy pausing a bit from the increase in virus cases this summer, a reduced and late-arriving package of stimulus renewal will only add to the economy’s headwinds as we move into the fall and what will likely be another wave from the virus. Not saying we’re fiddling while Rome burns but it does look like we’re heading in that direction if things don’t turn soon.
While Treasuries Rally MBS Rally Even More
Equity markets struggled late in July as increasing virus cases continued to dim V-shaped recovery hopes. That same concern fed a rally in Treasuries for most of July such that yields ended the month at range lows that had held since early March. For example, the 10-year Treasury yield ended July at 0.53% which was just under the closing low from March 9 of 0.54%. Given that the near-term outlook for the virus remains problematic, and with the aforementioned delay in fiscal stimulus renewal, it’s not surprising that yields have indeed broken below range lows this week.
While Treasuries have had a good month, MBS has had an even better one. For example, the FNMA 30yr current coupon spread versus a 5yr/10yr Treasury blend was 111bps as July began and it ended July at 88bps. And as you can see, spreads have only continued to tighten in the early days of August with the spread currently at 83bps, the lowest since August 9, 2019. The average spread over the past year is 104bps. So MBS spreads tightened considerably in July, and are continuing to tighten in the first week of August. That action may offer attractive prices for those looking, or needing to take gains from that sector.
Agency Indications — FNMA / FHLMC Callable Rates
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