No New Concerns

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Yesterday afternoon treasuries and mortgage prices were hit on a news story out of the Financial Times saying the Fed will begin tapering as early as three months frm now. Prior to the news story markets were generally unchanged ahead of the Fed policy statement tomorrow afternoon. The FOMC meeting begins today but there will be nothing frm it until tomorrow. Also tomorrow after the release of the policy statement Bernanke will hold a press conference; if between the policy statement and his press conference it doesn’t stop the increase in interest rates the 10 yr note is very likely to climb to 2.40% and mortgage rates up another 20 basis points in rate for 30 yr loans. At 8:30 this morning May CPI was in line with estimates, up 0.1% overall and the core (ex food and energy) up 0.2%. Inflation isn’t an issue these days, well under the Fed’s 2.0% target; yr/yr CPI +1.7%. The recession in Europe and slower growth in emerging markets such as China, combined with restrained wage gains in the U.S., have made it difficult for companies to raise prices. The lack of inflation gives Fed policy makers, meeting today and tomorrow in Washington, more leeway to address unemployment as they consider whether to dial down their record monetary stimulus. May housing starts were expected up 11.0% after declining 14% in April, as reported starts were up 6.8%, still a good number even though less than forecasts. May building permits were expected to have declined 4.0% as reported down 3.1%. Applications to build one-family homes increased 1.3% to a 622,000 pace, the fastest since May 2008. Starts on multifamily projects such as apartment buildings increased 21.6% to an annualized rate of 315,000. At 9:00 this morning the 10 yr note at 2.21% +3 more basis points and 30 yr MBS prices down 17 bps frm yesterday’s close. Stock indexes were pointing to a slightly better open at 9:30. At 9:30 the DJIA opened +31, NASDAQ +7, S&P +2; 10 yr note 2.21% +3 bp, 30 yr MBS price down 16 bp frm yesterday’s close. Nothing now to be concerned about through the remainder of the day; the day’s trading could be choppy as investors and traders position for the FOMC meeting tomorrow afternoon. The bond and mortgage markets remain bearish both from a fundamental point as well as technically. No matter the personal views, do not under estimate the depth of the present bearishness that exists in the interest rate markets. Tomorrow if the FOMC and Bernanke cannot convince markets that the QEs will continue longer than is currently expected the 10 yr will likely move to 2.40% the next technical target. The FOMC and Bernanke will have to down play the idea that the economy is improving and that unemployment is still too high to trigger the Fed to begin tapering. Bernanke will also have to convince markets that when the Fed does begin to slow its purchases it will be very slow in dialing the QEs back. Another increasing concern in the markets; will Bernanke stay for another term if the opportunity is extended to him? Overnight, President Obama commented that Fed Chairman Ben Bernanke has ‘stayed a lot longer’ than he wanted, paving the way for what looks like the Chairman’s exit when his term expires in January. Bernanke has been the driving architect for the Fed’s move to prop up the economy by printing money at a rapid rate (QEs), within the Fed there are wide differences opinion over the effectiveness of continued support for  interest rates. Who will replace him? Janet Yellen the Vice Chair, or an outsider? Regardless of the who, the main question that will begin to dominate thinking as the calendar falls is will Bernanke’s polices be continued.