Market Snapshot 3/13/2012

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Feb retail sales released at 8:30 was better than expected. Estimates were an increase of 1.0%, as reported +1.1%; excluding auto sales markets were looking for an increase of 0.7%, as reported +0.9%. January retail sales were revised from +0.4% to +0.6%; excluding auto sales from +0.7% to +1.1%. The initial reaction pushed the 10 yr note yield to 2.07% and MBS prices down 6/32 (.18 bp), but by 9:00 both treasuries and mortgage prices were off their lows, MBS price on 30 yr fixed down only 1/32 (.03 bp). Retail was the highest in five months with 11 of 13 industry groups showing increases in demand.

US stock indexes are stronger this morning on the solid retail sales data; at 9:30 the DJIA opened +44, NASDAQ +20 and S&P +7. 10 yr note -8/32 at 2.07% +4 bp and MBS 30 yr price -3/32 (.09 bp). Better US retail sales and gains in Germany investor confidence pushing equity prices higher. German investor confidence jumped to a 21-month high in March. The index of investor and analyst expectations, which aims to predict economic developments six months in advance, advanced to 22.3 from 5.4 in February. That’s the fourth straight increase and the highest reading since June 2010. Economists forecast a gain to 10.

At 10:00 Jan business inventories were thought to be up 0.6%; as reported inventories increased 0.7%. Final sales up 0.4% suggesting businesses are stock piling inventories; the growth in inventories is the largest since last October.

1:00 this afternoon brings Treasury back to the borrowing window with $21B of 10 yr notes to be auctioned. Yesterday’s 3 yr seemed OK to me but the consensus thought it didn’t meet expectations. Normally the farther out the curve investors are less aggressive, however at 2.07% the 10 may be attractive since it has held at 2.10% five times since mid-January. Today’s auction is in the face of the FOMC policy statement at 2:15.

The FOMC policy statement (2:15) will likely reiterate the Fed will continue to keep the FF at present levels through the end of 2014 even with employment improving and consumer confidence improving. Bernanke, in his semiannual monetary policy report to Congress, said maintaining monetary stimulus is warranted even with employment gains and a lower jobless rate. While there are “some positive developments in the labor market,” Bernanke told lawmakers on March 1, “the pace of expansion has been uneven.” The rise in gasoline prices “is likely to push up inflation temporarily while reducing consumers’ purchasing power.” Curious that he talked about gasoline prices increasing inflation since the Fed generally discounts food and energy prices when judging inflation.

There is still somewhat of a belief that the Fed will do another easing move; while not close to a consensus some still hold that the Fed will increase purchases of MBSs and treasuries to keep long term rates at these low levels. We do not believe the Fed is ready to launch another buying spree, while it will remain on the radar any potential easing isn’t likely as long as the economy is improving. The idea of another easing move comes from comments Bernanke has made more than a few times that the economic recovery has been “uneven”. Keeping the FF rate at 0.25% for another almost two years is sufficient to keep interest rates from increasing much, it fuels demand for long term rates.