Prior to 8:30 when Feb retail sales were reported the 10 yr note at 2.00% was -2 bp and 30 yr MBSs were up 6 bp frm yesterday’s close. Retail sales for Feb was expected to be a little soft on concerns the payroll tax increase might continue slow spending seen in January. The estimate for overall sales was +0.6% and when auto sales are extracted, up 0.2%. Sales increased 1.1% and ex-auto sales +1.0%. Feb sales ex-autos and gasoline were up 0.4%. Jan overall sales was revised to +0.2% frm 0.1% and ex-auto sales from +0.2% to +0.4%. The stronger sales report turned markets; at 8:45 the 10 yr note -5/32 at 2.04% +2 bp frm yesterday’s close and 30 yr MBS price down 9 bp frm the close yesterday. US stock indexes were weaker prior to 8:30, at 8:45 back to unchanged. Feb retail was the strongest in the last five months, adding more conviction the economy is improving.
The Feb employment report last week also was better than markets were expecting, now retail sales adds to the optimism that recovery is happening quicker than thought. Even the Fed should be surprised with the number; the Fed has continued to say the economy is improving but not as rapidly as retail sales and the Feb employment data has indicated. Eight of 13 major categories in the sales report showed increases last month, led by a 5% jump in receipts at gasoline stations that reflected higher fuel costs. Sales also climbed at building materials outlets, auto dealers and general merchandise stores. Next week the FOMC will meet on Tuesday and Wednesday with the policy statement released Wednesday afternoon; how will the Fed frame the recent firmer data? Bernanke will likely hold that the economy still has soft spots and that unemployment is still too high. The Fed will continue the QE buying of $85B of treasuries and mortgages, in the eyes of the Fed the easing is helping and it will continue for months ahead.
US retail sales data didn’t help stock markets in Europe, all three major markets in the region were slightly weaker today on soft industrial production data. Production in the 17 nation euro zone in Jan declined 0.4% on estimates of a decline of 0.1%. Yr/yr production down 1.3%. Europe’s economy struggling and presents a drag on global markets. In China its economy also slowing as the country turns inward toward domestic improvements and away frm relying mostly on exports.
Earlier this morning the weekly MBA mortgage applications data; the overall composite index -4.7%, the purchase index -3.0% and the re-finance index -5.0%. The interest rate for 30 yr conforming mortgages increased to 3.81% for 80% loans with origination fees included, an increase of 11 bp frm the previous week and the highest rate since last August. Until last Friday’s employment report 30 yr rates were about unchanged frm the prior week but the strong data sent rates climbing Friday morning. Both the purchase and re-finance indexes the previous week were up 15%.
At 9:30 the DJIA opened -4, NASDAQ -0.4, S&P -0.7; 10 yr note at 2.04% +2 bp, 30 yr MBS price -12 bps.
Jan business inventories at 10:00 was expected up 0.5%; as reported inventories increased 1.0%, Jan inventories originally +0.1% were revised to +0.4%. The increase in inventories the largest since May 2011. At the January sales pace, businesses had enough goods on hand to last 1.29 months, up from 1.28 months in the prior month and the highest since August. Business sales dropped 0.3%, reflecting declines at factories and wholesalers. Purchases at retailers advanced 0.3% after a 0.4% gain in Dec.
At 1:00 Treasury will auction $21B of 10 yr notes, yesterday’s 3 yr auction was somewhat disappointing, the 10 yr is much more interesting as it impacts mortgage rates and long term fixed income investors. The demand will be important, at last month’s 10 yr auction the 10 went 2.04%, the demand last month was somewhat soft compared with previous recent 10 yr auctions.
Treasury will report the Feb budget data at 2:00; markets are expecting the deficit for the month at -$205B.
By 10:00 this morning the stock indexes were trending lower, unable to improve on the retail sales report. Unless the S&P can make a new all-time high today or tomorrow, it is unlikely to happen until the conclusion of the FOMC meeting next Wednesday. The longer it takes the S&P to make a new high, (it is 16 bp away at 10:00), the more nervous traders will become and in turn may push the stock market down on profit-taking ahead of the FOMC meeting. That said, we do not expect a serious decline in stock indexes which will keep interest rates frm declining much. Any improvement in mortgage rates should be used to lock in critical deals; we don’t believe the bond and mortgage markets will lose their bearish outlooks either fundamentally or technically.
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