Friday, May 31, 2013

Weak Open

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Interest rate markets started a little better this morning with stock index trading pointing to a weak open at 9:30. At 8:30 April personal income and spending; income was generally expected  to be +0.1%, as released income was unchanged frm March. Personal spending, expected unchanged frm March declined 0.2%. Not good numbers for the bullish economic outlook but not a wash out either. There wasn’t much reaction to the weaker data in either stock indexes or the bond market. Consumer spending accounts for 70% of economic growth, March spending was originally reported +0.2%, in today’s data it was revised to +0.1%. The April decline in spending was the first decline since May 2012. The price index tied to spending, the gauge tracked by Federal Reserve policy makers, fell 0.3% in April, the biggest drop since December 2008, as fuel costs retreated. The so-called core price measure, which excludes food and fuel, was unchanged from the prior month and was up 1.1% from April 2012, matching a record low and confirming inflation is well under the Fed’s preferred target of +2.0%. Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, real purchases rose 0.1%, the smallest advance since October, after a 0.2% increase in the previous month.

At 9:30 the DJIA opened -46, NASDAQ -15, S&P -5; 10 yr 2.10% +1 bp, 30 yr Fannies +8 bps and 30 yr Ginnies +18 bps.

At 9:45 the May Chicago purchasing managers’ index was expected at 50.0 frm 49.0 in April; it exploded to 58.7, the largest monthly increase since March 2012. The index clearly above 50 the level that defines expansion and contraction. The reaction turned the stock market around quickly, from -54 earlier at 9:50 -6. The 10 yr jumped to 2.13% frm 2.10% and 30 yr MBS prices down 18 bp on the session and down 26 bp frm 9:30.

At 9:55 the U. of Michigan consumer sentiment index, expected at 83.7 the index leaped to 84.5 the highest reading since July 2007.

The bond and mortgage markets tried to improve early but the Chicago index and the U. of Michigan sentiment index turned the 10 back to 2.15% and weakened the mortgage markets. The bond bear got more meat to chew and took any near term optimism away. The technicals are still bearish; regardless of the debate over what the Fed will do as long as any data on the economy is better than forecasts there is very little chance of any significant improvement in interest rates. By 10:00 the 10 yr note was 2.16% from 209% earlier this morning before the strong economic reports. More fuel for the view the Fed may begin exiting QE. One key issue these days is what should the interest rates be based on the data and inflation (the lack of it)? With central banks around the world led by the Fed manipulating interest rates the last 2 yrs there is really no way to determine where the level of rates should actually be. That said, don’t fight the reality of the present condition, unrelentingly bearish.

The MBS prices below are at 9:30; at 10:15 the 30 yr price -50 bp frm yesterday’s close and 58 bps lower than at 9:30. 10 yr at 10:15 2.17% +8 bp

Thursday, May 30, 2013

Home Sales Expected To Go UP!!!

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Weekly jobless claims at 8:30 was slightly weaker than forecasts, increasing 10K to 354K with estimates of unchanged. Last week’s clams revised up an additional 4K to 344K. The smoother 4 week average increased to 347,250 frm 340,500 last week; the number of people continuing to collect jobless benefits rose by 63,000 to 2.99 million in the week ended May 18. Not a good report but not bad either; prior to the data the 10 yr note was down 11/32 at 2.15% +3 bps, 30 yr MBS prices down 23 bps after the strong bounce yesterday. Stock indexes were better prior to 8:30 and held their gains after the data.

Q1 GDP preliminary data showed the quarter grew at 2.4% slightly less than 2.5% expected and down frm 2.5% on the advance report last month. Slower inventory building and cutbacks in government spending overshadowed the biggest gain in consumer purchases since the end of 2010. Consumer spending, which accounts for about 70 percent of the economy, increased at a revised 3.4 percent annualized rate in the first quarter. The gain, which added 2.4 percentage points to GDP, was more than the previous estimate of 3.2%. This is the second of three for the quarter, with the final release scheduled for late June when more information becomes available. Overall take; the quarter showed improvement in the economy, the key strong consumer spending was the main driver.

The slightly softer data took a little away from the stock indexes in the futures markets and erased the losses in the mortgage markets. At 9:00 MBS prices were unchanged after trading off 23 bp earlier; the 10 yr note back to unchanged at 2.12% after climbing to 2.15% before the data. At 9:30 the DJIA opened +13, NASDAQ +8, S&P +3; 10 yr note unchanged at 2.12% as were 30 yr MBS prices. Within a few minutes of the open though the stock market went negative, then only 20 minutes into the day the DJIA jumped up 70 points.

At 10:00 April pending home sales were expected to be up 1.3%, as reported sales were up just 0.3% frm March. Yr/yr pending sales up 10.3% the best since Apr 2010 when the home buyers credit ended.

At 1:00 Treasury will auction $29B of 7 yr notes to complete this week’s borrowing. Yesterday the 5 yr auction met with decent demand.

The US stock market is exhibiting some increased volatility as we noted it would after the strong rally over the past three months. The recent increase in interest rates is causing a little concern about how the increase in mortgage rates will impact the overall economy. It has been the housing sector that has driven the improvement in the economy and consumer confidence; any slowing in the housing sector may take a little wind out of stocks. No major selling so far but the last couple of days have been volatile with wide swings in the indexes through the sessions. A little pause, or a correction? The bond and mortgage markets have stopped their increases, we expect some improvement in rates over the next few days. The run-up in rates at the speed in which it occurred does suggest the end has come for any lower rates, but we believe the Fed will continue to support the low rate environment with QEs that will keep rates from increasing much more and likely see some small decline from present levels. Unemployment is still too high and the economy still fragile. The Fed isn’t going to let all its efforts go down the drain now, if it takes more QE the Fed will do it.

Technically, what we have going for us is that both the bond and mortgage markets are momentarily oversold based on momentum oscillators. That said though, the overall trend is bearish and will continue unless the 10 yr note declines below 1.97%. Look for near term improvement in prices but don’t ignore the bearish trend. The data this morning was all a little worse than expected but no slippage in the stock market and not much change in the rate markets so far.

Friday, May 24, 2013

Markets Quiet With Upcoming 3 Day Weekend

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Markets started quietly this morning ahead of the coming three day weekend. At 8:30 April durable goods orders were better than estimates, +3.3% against +1.2% expected; ex the volatile transportation orders durables increased 1.3%, the first gain in three months. March orders were down 5.9%, revised from -6.9% originally reported. The transportation component gained 8.1% after falling 14.7% in March. The report was better than thought but still isn’t real solid; the figures used to calculate gross domestic product this quarter were less positive, indicating business investment is cooling. Shipments of non-defense capital goods excluding aircraft dropped 1.5% after increasing 0.5% in March. Gains in inventories may help offset some of the softness in capital spending this quarter, limiting the damage to growth.

At 9:00 the stock indexes were pointing to a lower open at 9:30; the 10 yr note rate 2.00% down 2 bp and 30 yr MBS price at 9:00 +20 bp frm yesterday’s close. At 9:30 the DJIA opened -54, NASDAQ -19, S&P -8; 10 yr note at 2.00% -2 bp and 30 yr MBS price +20 bp frm yesterday’s close.

Markets still debating what Bernanke and the FOMC minutes really mean in terms of when the Fed will begin to withdraw some of the QEs. Wednesday there was enough confusion between the FOMC minutes of the 5/1 meeting and Bernanke’s testimony at the Joint Economic Commission that sent stocks and bonds in a wild trade; the 10 yr treasury note range on Wednesday, 1.89% to 2.04%, 30 yr MBS prices down 100 basis points. In the minutes there was evidence that more members were debating the possible tapering off of the $85B Fed buying; at the testimony Bernanke answered a question that within the next three or four meetings the Fed may begin to lessen the monthly purchases. Now after a day of reflection markets have realized the Fed will only move when the economy warrants it---and the movement from the Fed could be an increase as well as any tapering, all dependent on the economic conditions.

The Fed is always in play when it comes to the bond and stock market, especially now. On one hand there isn’t yet enough evidence that the US economy is gaining enough momentum for the Fed to withdraw its easing amounts; on the other hand, underlying all of the debate still holds that the end is approaching. As noted previously the next two weeks may be volatile as each key economic report is injected into the question---what does it mean to Bernanke? The recent spike in interest rates was triggered by the strong April employment report on May 3rd, was it the beginning of improvement or just a one off gain? Markets are likely to remain uncertain now until the May employment report on June 7th. Whether or not the Fed keeps the money flowing or begins to taper, we remain convinced that the interest rate markets will not likely decline much on any rallies. We suggest taking advantage of any improvements in the rate markets to get deals done.

The bond and mortgage markets will close today at 2:00 while stocks will go the entire day. Markets closed on Monday. Next week not much data, Treasury will auction $99B of 2s, 5s and 7 yr notes.

Thursday, May 23, 2013

Mortgage Rates

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Prior to 8:30 this morning the 10 yr note at 2.01% down 2 bps frm yesterday’s huge increase; 30 yr MBS price up 26 bp after falling 98 bp yesterday. 8:30 we got weekly jobless claims, always important but now even more so after the Federal Reserve confused markets (and likely themselves) with conflicting comments frm Bernanke’s testimony and the FOMC minutes of the 5/1 FOMC meeting. Bernanke’s comments in the hearing implied that some tapering was being discussed, saying the Fed may begin thinking about ending in the next three or four meetings. The FOMC minutes indicated there is a growing discussion within the group about reducing the QEs, maybe at the June FOMC meeting. Either Bernanke is testing the waters on reaction to unwinding QEs, or he and the other Fed officials are on different pages. Regardless, the Fed clearly upset markets yesterday; another huge spike in rates and what may be the beginning of a major correction in the stock markets.

Weekly jobless claims at 8:30 were about in line with estimates; claims were expected to have declined 15K to 345K, as reporte4d claims were down 23K to 340K with last week’s claims revised to 363K from 360K. There was no noticeable reaction to the data. The 4 week average, a smoother look at claims, was down 500 to 340K filings; continuing claims declined from 3.04 mil to 2.91 mil.

Most all major stock markets around the world are declining today after the confused comments from the Fed yesterday. Japan’s key index down 7.3%, all Europe’s stock markets taking huge hits. At 9:00 this morning based on US futures trade the DJIA looked like an open down 77 points frm yesterday’s decline. The 10 yr at 9:00 at 2.20% -2 bp and 30 yr MBSs -3 bp after being up 26 bp at 8:20 am. Already markets have exhibited increased volatility; at 9:30 the DJIA opened -40, NASDAQ -40, S&P -16; the 10 yr note declined to 1.98% and 30 yr MBS prices back to +25 bps frm yesterday’s close.

So, what can we take away from yesterday’s events that have led to increased uncertainty about the Fed? First; the Fed is not likely to end its QEs or taper them back until there is more evidence that the US economy is actually gaining momentum. Recall that the current run-up in rates began when the April employment report was released on May3rd, since then the various reports on the economy from April and May data reported so far have not been very strong; manufacturing reports have weakened, home sales while better so far may slip as mortgage rates have increased (re-financing has declined substantially based on recent data), business activity frm the Philly Fed index actually turned negative in May. Second; we have to accept the reality that there is increasing discussions within the Fed about at least thinking about how and when, the debates have accelerated recently. Third; as we have noted many times, by the time the Fed actually announces its intentions to reduce monthly purchases, the markets will have already discounted the decision in prices and yields. Fourth; regardless of how markets are reacting now, the Fed is unlikely to back off the current $85B a month of purchases until the end of the year or early Q1 2014.

At 10:00 April new home sales were expected down 1.8%, sales increased 2.3%. The annual increase on prices up 15%, the  largest increase since 1963 at $271,600. Based on the sales pace there is only a 4.1 month supply on the market. Builders are able to increase prices, a positive sign; now markets will look to May sales data on both existing and new home sales as mortgage rates have risen since April. Stock indexes improved on the better report.

The next two weeks are likely to see increased volatility, as if we haven’t had enough already; between now and June 7th when the May employment report is due there are a number of data points that while always important, will carry increased importance in the face of Bernanke’s remarks and the FOMC minutes released yesterday. Each US and global economic reading has the potential to move markets. We expect market volatility will remain at high levels. And it isn’t just US data; China this morning reported its manufacturing sector is continuing to decline. Bottom line; if the economy isn’t moving forward, the Fed isn’t going to change its easing policy.

Once again, do not fight the tape now; the bond market is bearish---period. From our perspective it will continue bearish until the 10 yr moves below 1.85%, the first resistance is at 1.97% but even that level will not change the technical bearish outlook. The prolonged decline in interest rates is very likely over, suggest taking advantage of any market improvements. There is little reason now to anticipate interest rates will re-test the recent low yields.

Wednesday, May 22, 2013

Quiet Start

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US markets started quietly this morning ahead of Bernanke’s testimony to the Joint Economic Committee at about 10:00. Markets are completely focused on the Fed’s QEs recently, and when the Fed will begin to unwind its monthly purchases of treasuries and MBSs. The question of when was fueled by the April employment report on May 3rd that was stronger than most were expecting. Since then US interest rates increased as well as the key stock indexes. Yesterday there was a lot of position squaring as traders short the bond market evened out a little sending the 10 yr note yield down 4 bp and mortgage prices up 36 bps. At 9:00 this morning the 10 yr was down another bp to 1.93% and 30 yr MBS price up 9 bps. Stock indexes were aiming at a slightly better open at 9:30.

Early this morning the weekly MBA mortgage applications were out and not a surprise that apps have fallen for the second week as mortgage rates have increased; especially re-finance apps. The purchase index is down 3% following the prior week's 4% decline, a tangible reversal that points to trouble for May home sales compared to April home sales. The refinance index is really showing its sensitivity to mortgage rates, falling 12% after the prior week's 8% drop. The average 30-year rate jumped 12 basis points in the prior week and is up another 9 basis points in the latest week to an average 3.78% (conforming balances $417,500 or less).

At 9:30 the DJIA opened +13, NASDAQ +1, S&P +1. The 10 at 1.93% and 30 yr MBSs +9 bps.

The first economic report this week at 10:00 this morning; April existing home sales. Forecasts were that sales increased 2.6% to 5.0 million units (annualized); as reported sales were up 0.6% at 4.97 mil units; yr/yr sales up 9.7%. March sales were revised higher, from -0.6% to -0.2% offsetting the weaker April data.

Yesterday NY Fed President Bill Dudley said he has not decided whether the Fed’s next move should be to enlarge or shrink its bond buying program as he called for a fresh look at its eventual retreat from record asset purchases; “Because the outlook is uncertain, I cannot be sure which way -- up or down -- the next change will be.” While many Fed officials have voiced support for shrinking purchases as the next step, Dudley, who is also vice chairman of the FOMC, signaled willingness to increase purchases. Earlier today St. Louis Fed President Jim Bullard said the central bank should continue its bond buying because it’s the best available option for policy makers to boost growth that is slower than expected. Dudley said policy makers will know in three to four months whether the economy is healthy enough to overcome federal budget cuts and allow the central bank to begin reducing record stimulus. “I don’t really understand very well how the tug-of-war between the fiscal drag and the improving economy are going to sort of work their way out.”

Bernanke is not likely to make the picture anymore clear in his testimony; the Fed simply isn’t sure about the forward path of the economy at this point. The last two months of data have seen a lot of weaker than expected data, but the April employment report still rings in the ears of most analysts and more importantly the Federal Reserve. Adding more uncertainty is the sequester, cutting spending is keeping the growth down; Dudley saying the spending cuts and tax increases will lessen GDP growth 1.75% this year. Bernanke isn’t likely to change is comments from the last FOMC meeting, providing anything of consequence to the debate on what the Fed will do. The only thing that has occurred since the last FOMC meeting was the strong April employment report two days after the conclusion of the meeting.

Not only Bernanke today; at 2:00 the minutes frm the 5/1 FOMC meeting will be released. Normally the minutes provide some insight on the details of the discussions in the meeting. This time with Bernanke leading the minutes they won’t likely carry as much interest in markets.

Technically, the 10 has resistance at 1.85%; until that level breaks the overall outlook remains bearish. 30 yr May 3.0 FNMA coupon has resistance at 103.47, about 70 bp higher than where it trades today.

Tuesday, May 21, 2013

Stock indexes Unchanged

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Very early this morning (7:00 am) the stock indexes were unchanged as was the interest rate market. By 9:00 the key indexes were improving and more selling was occurring in the bond and mortgage markets. Yesterday the 10 yr note closed at its highest rate in this current climb higher in rates. The 10 at 1.98% at 9:00 this morning is at another new high; MBS prices also under pressure again. The increase in rates continues as investors are jettisoning low long term fixed income investments on belief the end has already occurred for the US bond and mortgage markets.

Once again today there are no scheduled economic reports. Most all focus now is on tomorrow’s testimony from Bernanke to the Joint Economic committee about the economy and the outlook. Regardless of his prepared opening remarks the focus is likely to center on his thoughts about the Fed’s bond and mortgage buying programs. Up until now the Fed has consistently talked about the slowly improving economy, although the policy statement issued after the FOMC meeting on 5/1 stated the Fed sees downside risks to the economic outlook. He will chide Congress and the Administration again that what is needed now is fiscal help, monetary help has about run its course and hasn’t achieved the desired effect; unemployment still high and there is no inflation (actually deflation is currently more of a concern). On that point, it isn’t good for the economic recovery to have the inflation rate as low as it is now (1.7% yr/yr). The economy is moribund with little pricing pressure to motivate consumer spending.

The bond market is headed for its first monthly loss since January before St. Louis Fed President James Bullard and New York Fed President William C. Dudley speak today. Fed Bank of Chicago President Charles Evans said yesterday the economy has improved “quite a lot” and he would be amenable to the central bank slowing its asset purchases if he had confidence job growth would be maintained. The Fed publishes minutes tomorrow of its April 30 to May 1 policy meeting. Bullard said last month that unless inflation improved he would favor more QE. If one just followed the various comments from Federal Reserve officials, confusion would be the end result. The only voice that matters is Bernanke’s, but the noise from the other Fed officials continues to roil markets.

At 9:30 the DJIA opened +24, NASDAQ +1, S&P +1. The 10 yr at 9:30 1.97% unchanged, 30 yr MBSs -9 bp, FHAs -20 bps.

Last Wednesday the bellwether 10 yr note hit an intraday high yield of 1.98% before ending the day at 1.94%. This morning the 10 is re-testing that level, if the note can hold here we may see some short-covering in the next few days improving prices a little. If the 10 closes above 1.97% it will add even more negative vibes in the interest rate world. All technicals are increasingly more bearish, a new high yield close will likely push the outlook for the 10 to 2.06%, the high rate going back to mid-March. Is there a potential for a rebound in MBS prices? Possibly, but it won’t likely be enough to change the overall bearish outlook. Do not fight this bearish trend.

Monday, May 20, 2013

Mortgage Markets^^

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The mortgage markets started better this morning after the 10 ye found early support at 1.95% and US stock indexes pointing to a weaker open at 9:30. There are no scheduled economic reports today or tomorrow, and not much else on the calendar. Wednesday is the big day this week; Ben Bernanke will testify at the Joint Economic Committee and the 5/1 FOMC minutes will be released. Also Wednesday April existing home sales are due; sales expected to have increased about 2.6%.

At 9:00 this morning the 10 yr note yield down 2 bps at 1.93%, 30 yr MBS conventional mtgs +20 bp while FHAs up just 3 bps. At 9:30 the DJIA opened -22, NASDAQ -7, S&P -2; the 10 yr at 1.93% -2 bp and 30 yr conventional MBSs +21 but FHAs and 15 yr mtgs flat. European stocks were little changed, following four consecutive weeks of gains for the benchmark Stoxx Europe 600 Index. U.S. index futures fluctuated, while Asian shares rallied.

Scanning the news wires this morning there was nothing of substance in terms of market interest. The same may be the case tomorrow with no US data being reported. Hard to find anything this morning that might have any impact on the markets. Dallas Fed President Richard Fisher on CNBC early this morning talking about the Fed’s easing’s and how the Fed should begin to exit; slowly with small reductions at a time. He talked about the MBS market, saying he believes the market has righted itself and by innuendo suggested the MBS purchases may be the first to see some withdrawal. Nothing really new in his remarks, everyone knows when it is time for the Fed to take the ‘bowl’ away it will be a gradual move. He, like us, wonders what impact cutting MBS purchases will actually have. Who will want to hold the present MBSs at these low yields when there is no doubt that interest rates are going to increase frm these historic low levels. As for the Fed beginning to exit, it is unlikely Bernanke will want to begin winding down until there is more data that confirms the economy is gaining momentum. So far the last couple of months the preponderance of data has been soft.

GE’s finance unit plans to return $6.5B in dividends to the parent company in 2013 as Chief Executive Officer Jeffrey Immelt pursues his plan to shrink the size of the business. GM Capital was hard hit when markets collapsed in 2009. GE Capital resumed the payouts last year, returning $6.4B to its parent, after suspending them in 2009 as frozen credit markets jeopardized its access to financing. Immelt has pledged to reduce the company’s reliance on profit from the financial unit and is tapping it for cash to fund stock buybacks and dividends that are slated to return $18B to shareholders this year. The payments from GE Capital will consist of $2B in earnings dividends and a $4.5B special dividend, GE said today in a statement. GE Capital paid a first-quarter earnings dividend of $447 million on April 19.

Markets may see some minor improvement in the bond market and minor losses in the stock market today and tomorrow ahead of Ben Bernanke’s Congressional testimony on Wednesday. Nothing significant, mainly balancing positions prior to any potential market-moving comments frm the Chairman. What would it take to turn the present negative sentiment around in the bond market? Not sure what fundamentals would occur, but the world is anything but relaxed these days as evidenced with the high levels of volatility in the bond and mortgage markets over the last three weeks. Technically, if the 10 yr note yield were to fall below 1.80% that would likely change the bearish mood that is dominate at the moment.

Friday, May 17, 2013

Unchanged

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Early this morning the interest rate markets were unchanged from yesterday’s close; by 9:30 though the 10 yr note yield had increased to 1.90% frm 1.88% and 30 yr MBSs -16 bp frm yesterday’s close. The DJIA opened +40, NASDAQ +19, S&P +5; the 10 yr at 1.90%, mtg prices -16 bps. There were no economic reports today until 9:55 when the U. of Michigan consumer sentiment index, expected at 78.0 frm 76.4 at the end of April. The index jumped to 83.7, a strong improvement and nice to see but the index is volatile and generally reflects sentiments driven by the equity markets and the cost of gasoline. At 10:00 April leading economic indicators, expected +0.3% increased 0.6% after declining 0.2% in March. The interest rate markets had a nice day yesterday after two weeks of strong selling that pushed the 10 yr from 1.63% on 5/2 to 1.97% on Wednesday. The bond market remains quite volatile, yesterday’s improvement was a momentary reaction to an oversold condition and hasn’t changed the bearish patterns, since there is no follow-through so far this morning the one day rally is less significant than what many were expecting. The stock market is the only game in town where investors have any chance of gaining a decent return; mostly driven by the Fed and other central banks flooding money into financial markets. The economy is still an uncertain picture; yesterday more weaker than expected data, increased weekly jobless claims and the May Philly Fed business index fell under zero (-5.2), another report weaker than thought. April manufacturing data and now May reports frm various Fed districts have been softer than markets were thinking. Another country out this morning reporting weak growth; Russia’s GDP increased 1.6% frm a year ago, declining for the fifth quarter. The economy of the world’s largest energy exporter is grinding to a halt as the recession in the euro area, which accounts for about half of Russian trade, extended into a sixth quarter. The GDP slowdown prompted the Economy Ministry last month to cut its 2013 growth forecast to 2.4% from 3.7% and last year’s pace of 3.4%. Most all the main global economies are wakening, but as long as the Fed and other central banks continue to keep interest rates at these extreme lows stock markets will continue to improve. But look out when the time comes for the Fed to begin unwinding of its QEs; unless there is a raid change in the economic outlooks and data supports that view, the global equity markets are set up for a major reversal. Technicals remain bearish in the bond and mortgage markets; the 10 yr note must decline and close below 1.80% before we would change that outlook. There is the likelihood now that the bond and mortgage markets will move in a tighter range, consolidating the recent spike in rates. At the moment we are expecting the 10 yr and MBSs to slow down while investors and traders consider the recent spikes; maybe 1.95% to 1.85% for a few sessions. Mortgages generally unchanged for the next week or so.

Thursday, May 16, 2013

Relief

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Finally the bond and mortgage markets may get a little relief from the unrelenting selling that has driven interest rates higher over the last nine sessions. At 8:30 weekly claims were expected to have increased 7K, as reported claims shot up 32K to 360K. The increase takes weekly claims to the highest in six weeks and adds another layer to the debate that is dominating these days; what really is the condition in the employment sector. The increase caught many by surprise and heightens the concerns about what state the economy is really in. The four-week moving average, a less volatile measure than the weekly figures, rose to 339,250 last week from 338,000.

The data in March and February was weaker than estimates, some of the April data also weaker. Then the April employment report was so strong compared to estimates the bond and mortgage markets, as well as a sea change that the Fed would likely begin taking the punch bowl away sooner than thought. The 10 yr yield spiked frm 1.63% to 1.97% yesterday and mortgage rates increased 18 bp in nine days. Today’s claim’s rocked the boat once more, and claims were not the only surprise today.

April housing starts were widely thought to have declined 6.4%, starts as reported declined 16.5%; permits were expected to have increased 5.0%, permits jumped 14.3% the highest permit level since June 2008. The decline in starts was the most since Feb 2011 and Mach starts were revised lower frm the original release. Construction of single-family houses fell 2.1% to a 610,000 rate from 623,000; multi-family starts declined 38.9%. The somewhat positive take-away is that the increase in permits suggests starts will increase in the months ahead.

April CPI declined 0.4%, the core (ex food and energy) +0.1%. These days inflation reports are confirming inflation is not on anyone’s’ radar. The CPI decline is the biggest since Dec 2008, CPI was -0.2% in March. Yr/yr CPI increased 1.1%, the weakest since Nov 2010. The core yr/yr +1.7%, the least since June 2011.

At 9:30 the DJIA opened -5, NASDAQ +3, S&P -2; the 10 yr note at 1.91% -3 bp and 30 yr MBS price +26 bps.

The final data point today; at 10:00 the May Philly Fed business index. Forecasts were for the index to have increased to 2.2 frm 1.3. The overall index declined to -5.2, any number under 50 is considered contraction. The weaker report matches the Empire State manufacturing index released yesterday that also fell under zero to -1.4. Manufacturing data recently is clearly showing a slow down; April industrial production yesterday -0.5% and April factory use declined to 77.8% frm 78.5% in March. The Philly report added a little more selling in the stock market on the release.

A little improvement in the bond market this morning and MBS prices are better. The recent trading in the MBS market has started stronger each day but has succumbed to selling as the days rolled on. So far today the pattern remains the same. The stock market so far has held well in the face of the weaker data and increase in weekly claims. As noted yesterday, the equity markets are currently in a win-win situation; weaker economic data keeps the Fed in play, stronger data fuels more positive economic outlooks. Meanwhile the swift spike in rates is providing an increasing view that the lows in the US and global bond markets have been achieved and the direction now is higher rates ahead. We have long said that the US bond market would find it extremely difficult to match the lows in rates seen last year and the low this year at 1.56% for the 10 yr note.

Wednesday, May 15, 2013

Weaker Than Expected

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April PPI was down 0.7%; the core (ex food and energy) +0.1%; both as expected and increasingly showing deflation is becoming an issue. The Fed’s target rate of 2.0% to 2.5% for inflation is lagging, annual inflation +1.8%. The NY Empire State manufacturing index for Mat was expected at +3.75, it declined to -1.4; any reading under zero is considered contraction. April industrial production was expected -0.2%, it declined 0.5%; April factory use was expected at 78.3%, use fell to 77.8% and March use was revised frm 78.5% to 78.3%.

In Europe Q1 GDP was weaker than expected, at -0.2% after a 0.6% decline in Q4 2012; estimates were for a decline of 0.1%. The German economy expanded 0.1 percent in the first quarter, while France contracted 0.2 percent and Italian output dropped 0.5 percent. Euro-area unemployment has reached a record 12.1 percent. The ECB forecasts that the euro economy will shrink 0.5 percent this year. That compares with the European Commission’s projection of a 0.4 percent contraction.

The reports this morning, here and in Europe, were weaker than expected; that has been the general case for the past two months with a few exceptions that were better, like the April employment report. Most of the economic measurements since March have been somewhat disappointing, at least from the perspective of estimates vs. actuality. Does the fact that the US and global economies are struggling have any impact on US and global stock markets? A resounding NO! This morning the 10 yr note eked out a little improvement, down 2 bp from yesterday’s close; the stock indexes opened down just 6 points, 30 yr MBS price at 9:30 +34 bp after the 37 bp loss yesterday.

At 10:00 the final data today; the May NAHB housing market index was expected at 44 frm 41 in April it was right on at 44.  

The Federal annual budget deficit is shrinking. According to the CBO the 2013 fiscal year that ends on Sept 30th is now projected at -$642B , down from its estimate of -$845B three months ago. After 4 yrs of annual deficits over $1 trillion the decline takes away much of the budget cut debates that has locked Congress up tight. Higher tax revenues and large dividend payments frm Fannie and Freddie are combining to bring the deficit down.

Earlier this morning the MBA reported last week’s applications. A big jump in rates pulled down mortgage activity sharply in the May 10 week. The purchase index moved down from multi-year highs, falling 4.0%, with the refinance index showing an even steeper decline, down 8.0%. The average rate for 30-year fixed mortgages with conforming balances ($417,500 or less) rose a very steep 12 basis points in the week to 3.67%. Application activity, including purchase activity which is still near multi-year highs, is volatile week to week, but this week's dip is severe and raises the risk that further increases in mortgage rates could hold down seasonal activity in the housing sector.

Technically speaking the stock market is very overbought now and the 10 yr and MBSs very oversold; that though isn’t making a lot of difference so far. In markets such as these when emotions are the drivers, technicals take a back seat. Not many care that the spike in rates has been so severe that normally there should be some correction, or that the climb in stocks isn’t based on much economic improvement but Fed policy. It is all about getting out of fixed income investments that won’t produce any real return and into the only investment that is sky-rocketing---stocks. In situations like these the technicals are less important until something rocks the sentiments.

Tuesday, May 14, 2013

Treasuries and Mortgages Better Today!!!

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Treasuries and mortgages started a little better this morning; the stock indexes were weaker but got a slight boost on comments frm a big investor, he said the stock market still has a lot of room to increase and essentially commented that any lessening of the Fed’s QE should not negatively affect equity markets. There’s $400B looking for a place to invest and markets shouldn’t worry about the Federal Reserve tapering its stimulus program, David Tepper, co-founder and owner of Appaloosa Management, said in an interview on CNBC.

There is no key economic data on the schedule; April import prices declined 0.5% as expected but export prices, thought to be -0.1% fell 0.7%. Export prices fell 0.5% in March; prices falling add more to the view inflation is no longer a concern. Tomorrow April PPI and Thursday April CPI will add more to the disinflation belief that has filtered through all markets recently. The lack of inflation concerns is to some extent a relief for fixed income investors, although there really hasn’t been much concern about it within markets; it has been mostly media hype. With inflation under control, monetary officials from the Federal Reserve to the European Central Bank have room to do more to stoke expansion without creating jumps in prices. On the opposite side of the argument over inflationary outlooks; PIMCO’s Mohammad El-Erian said he leans toward the possibility that it will be higher and less stable over the next three to five years. Markets don’t care much about outlooks three to five years away however.

PIMCO, according to Mohammad El-Erian, is shying away frm risky assets (stocks) as it sees a growing disconnect between financial markets and the global economy. In a report posted today on PIMCO's website, El-Erian said the world economy is undergoing a “stable disequilibrium” that could end in financial turmoil, greater social tensions and beggar-thy-neighbor national policies. Egged on by “hyperactive” central banks, investors are playing down the dangers and pushing financial markets higher. El-Erian, who popularized the phrase “new normal” to describe an era of lackluster growth, said economies are nearing a fork “where the current road eventually ends, giving way to one of two contrasting outcomes” -- a fast, sustainable expansion or a slowing world economy with countries “competing for a smaller pie.”

At 9:30 the DJIA opened +5, NASDAQ +5, S&P +2; the 10 yr note at 9:30 +5/32 ( 15 bp) at 1.90% with 30 yr MBSs +18 bp.

So far this morning the 10 and MBSs are holding minor price gains after the huge and swift increase in rates since the April employment report was released on 5/3. The bond and mortgage markets becoming oversold may attract investors with inflation data showing no inflation to worry about. That said, the nature and speed in which the bond and mortgage markets have been subjected to recently is disturbing about the outlook for rates. One employment report started the run; the Fed is still easing and other than a lot of discussion the Fed appears committed to keeping the QEs intact.

Monday, May 13, 2013

Aprils Retail Sales


Right out of the box this morning, April retail sales were better than forecasts. Sale up 0.1% on estimates of a decline of 0.3%; ex autos -0.1% as expected.  Sales in the U.S. rose in April, reflecting broad-based gains that may ease concern consumers are holding back. The 0.1% gain followed a 0.5% drop in March, Prior to 8:30 the 10 yr was up 2/32 at 1.89%, by 9:00 at 1.93%. US stock indexes were slightly weaker at 9:00 but no support in the rate markets. Early trade in the mortgage market saw another strong selling binge; at 9:00 30 yr FNMAs -28 bp frm the close on Friday.

The interest rate markets continue to reflect the possible end to the 30 yr old bond market rally that started in 1983 with 30 yr mortgage rates at 17% and the 10 yr note at 18% (bank prime rate at 20%). The action in the rate markets that was triggered by the strong April employment report has not been able to achieve even a modest bounce after rocketing the 10 yr frm an intraday low of 1.63% to 1.93% last Friday before ending the week at 1.90%. Mortgage rates up about 15 basis points in rates last week. Japan’s plan to weaken its currency is working against the US bond market; as the yen falls there is less demand for US bonds. Every technical indicator on the bond and mortgage markets is now solidly bearish; last Friday in a Tweet PIMCO co-CEO and bond king Bill Gross declared the end to the declining interest rate rally, even after a month ago Gross said he was increasing PIMCO’s investment in US notes and bonds. Most likely Gross was looking at the magnitude and speed in which rates rose last week.

The current move to exit long positions in the bond market that had built over the last few months on bets prices would increase and yields decline is driving rates to levels we were not expecting a couple of weeks ago. The race to the exit has done severe technical damage to the bullish outlook that had prevailed for months based mainly on the Fed continuing its easing and thoughts the economy is slowing has rattled fixed income markets and increased the view the end has arrived. The Fed hasn’t implied anything that it is about to end its monthly buying of treasuries and mortgages, so far there isn’t any evidence that the Fed will stop soon. Nevertheless, the rate markets are seriously wounded now. Speculative long positions or bets prices will rise, outnumbered short positions by 37,956 contracts on the Chicago Board of Trade. Net-long positions fell by 94,088 contracts, or 71%, from a week earlier, resulting in the biggest reduction in net longs since March. Hedge funds decreased their long positions in 10 yr note futures at the end of last week according to the CFTC.

At 9:30 the DJIA opened -40, NASDAQ -5, S&P -4. 10 yr note 1.92% +2 bp and 30 yr MBSs -18 bps. So far this morning the rate markets have continued the high intraday volatility; at 9:00 30 yr MBSs -28, at 9:30 -18, the 10 yr climbed as high as 1.94% early, slightly better at 9:30.

March business inventories, expected up 0.3% were unchanged, Feb inventories originally reported +0.1% was revised to unchanged. No reaction to the report.

No matter how we look at it, the speed and depth of the selling in the bond and mortgage market clearly states investors and traders are unloading a lot of the long positions held on ideas that rates would decline to re-test the lows at 1.40% on the 10 yr note seen last year. No matter how we try to paint a more optimistic outlook, we just kind find anything now that provides any near term evidence of a rebound. The momentum oscillators we monitor measuring the speed and magnitude in determining overbought or oversold are approaching over-extended levels but still not yet there yet. There will be a rebound, but from what levels? As we continue to remind; do not fight the tape here. This market at present is very bearish.

Thursday, May 9, 2013

Jobless Claims Attention Grabber

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This morning at 8:30 the first economic report of the week that drew any attention; weekly jobless claims. Claims were widely thought to be up about 11K to 336K frm last week, as reported claims fell 4K to 323K and last week’s claims revised slightly higher 327K frm 324K originally reported. Claims now the lowest in five years and imply that employers have reduced firings in recent weeks, but still not yet willing to radically increase hiring. The April jobs data last Friday revealed more increases in private jobs that markets were expecting, nevertheless hiring is still slow. The 4 wk average of claims, a better, smoother reading, fell to 336,750 the lowest since Nov 2007.  A Labor Department official today said there was nothing unusual that affected today’s figures. The number of people continuing to collect jobless benefits fell by 27,000 to 3.01 million in the week ended April 27. There are still 11.7 million unemployed.

There was little reaction to the better claims data in stock index futures trading before the 9:30 open; the three key indexes at 9:00 were essentially unchanged. The 10 yr note yield at 9:00 at 1.80% +3 bp frm yesterday’s close, but there is a hitch; yesterday Treasury issued a new 10 yr note at the auction substituting what markets will now track as the on-the-run 10 yr. The auction drew a yield of 1.81% so compared to the auction the 10 yr was down 1 bp. 30 MBSs at 9:00 unchanged from yesterday’s close.

At 9:30 the DJIA opened +3, NASDAQ -4, S&P -1; 10 yr note at 1.80% -1 bp frm yesterday’s auction. 30 yr MBSs unchanged from yesterday’s close.

March wholesale inventories released at 10:00 was in line with estimates, +0.4% but sales disappointed, down 1.1%.

At 1:00 Treasury conclude this week’s refunding with $13B of 30 yr bonds that will be a new 30 yr bond. Yesterday the 10 yr auction was not well bid, we expect the 30 to also be somewhat disappointing.

Over the pond the BOE left its stimulus program unchanged; the BOE Monetary Policy Committee kept asset purchases at 357 pounds ($584B). The central bank also kept its key interest rate at a record low of 0.5%. UK industrial production increased 0.7% in March against forecasts of 0.2% increase,  and followed the better industrial production and factory orders from Germany yesterday and Tuesday.

A couple of months ago Fannie reported a $18B profit in Q4; yesterday Freddie announced it made a profit of $4.6B in Q1. Fannie  released its Q1 report a few minutes ago +$8.1B. That the two government owned agencies are now making nice profits will likely continue and return all of the bailout funds from the housing market collapse. Freddie will pay back $7B to Treasury; the agency got a $71B rescue and so far has repaid about half of it. Fannie and Freddie have returned to profitability and will end up repaying all of the tax payers money much sooner than those politicians in their panic reaction to the housing bubble burst expected. Barney Frank and Chris Dodd along with many other panicked politicians, not having much of a clue about the housing and business sectors were intent on shedding the two agencies; maybe that they are profitable now will cause a change in sentiment, especially since the two politicians that set economic recovery back at least five years have gone out to pasture with the life-long pensions.

This morning the 10 yr note is adding to its technically bearish pattern. Yesterday the note breached its 40 day average, this morning testing its 100 day average at 1.81%. MBSs still are holding together but as long as the treasury rates are increasing it is only a matter of when that MBS’s technical picture turns increasingly more negative. After the strong increase on the 10 yr rate last Friday there has been no effort or interest to retrace  any of the spike, the implication is that the spike of 11 bp last Friday was not merely a knee jerk over-reaction.  

Wednesday, May 8, 2013

Slow Start in the Market

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It was another quiet start this morning with no news again today. This week has been almost completely void of any market moving news. The 10 yr note this morning early was at 1.79% up another basis point, while mortgage prices started unchanged; MBS prices were flat yesterday. Prior to the 9:30 open of the stock market the key indexes were a little weaker. At 9:30 the DJIA opened -20, NASDAQ -4, S&P -2; the 10 yr note after trading earlier at 1.79% was at 1.77%, 30 yr mortgage prices +9 bps frm yesterday’s close.

European stocks advanced for a second day and metals rose as China’s trade and German industrial output beat estimates after yesterday’s gains in factory orders. A report out of China showed exports increased 14.7%, the general consensus was an increase of 9.0%. Another central bank cut rates today; Poland the EUs largest eastern economy, struggling with declining growth, cut its seven day bench rate from 3.25% to 3.0%. The ECB cut rates last week, Hungry cut its rate for the ninth time, and Australia also cut its rate yesterday. Almost every central bank now if mimicking the Fed as there has been little improvement throughout the world. Central banks are the prime drivers pushing global equity markets higher; simply stated, there isn’t any other way to earn a decent return. Meanwhile, here in the US, we still have not seen any major report on the economy beating forecasts---except the April employment report and the higher revisions for Feb and March.

Mortgage applications increased 7.0% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 3, 2013. The Refinance Index increased 8% from the previous week to the highest level since December 2012.  The seasonally adjusted Purchase Index increased 2% from one week earlier to the highest level since May 2010. The unadjusted Purchase was 12% higher than the same week one year ago. The refinance share of mortgage activity increased to 76% of total applications from 75% the previous week to the highest level since February 2013. The HARP share of refinance applications fell from 34% last week to 30% this week. The government share of purchase applications declined to 29.1%, which is a two year low. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.59%, the lowest rate since December 2012, from 3.60%, with points increasing to 0.33 from  0.30 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 3.79% from 3.80%, with points decreasing to 0.20 from 0.29 (including the origination fee) for 80% loans. The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 3.35% from 3.34%, with points increasing to 0.57 from 0.37 (including the origination fee) for 80% loans.  The average contract interest rate for 15-year fixed-rate mortgages decreased to 2.81%, the lowest rate in the history of the survey, from 2.84%, with points increasing to 0.29 from 0.26 (including the origination fee) for 80% loans.

At 1:00 this afternoon Treasury will auction $24B of 10 yr notes; demand will be a concern as recent auctions of 10s haven’t met with strong demand. This one may be better due to the recent increase in rates.

Since the strong selling last Friday the MBS markets have been essentially unchanged, the 10 yr yield up 2 bps in rate since Friday’s close. The run-up in rates due to the better employment report may be a little overdone in the near term, but as long as the US and global equity markets continue to advance with no big declines any improvement in interest rates isn’t likely to drive rates back to levels seen last week before April employment. Technicals on the 10 are now bearish near term; the note yield trading above its 20 and 40 day averages, stochastics, relative strength and the moving average convergence/divergence index all bearish. Keep tuned and use any improvement in rates to lock in deals. The rest of this month the various economic measurements will likely generate increased volatility pending how they compare to economists’ forecasts and estimates.

Tuesday, May 7, 2013

Focusing on the employment report

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Treasury rates continue to increase this morning, MBS prices slightly weaker as a result. Yesterday the 10 increased 3 bp to 1.77% while by the end of the day mortgage prices were unchanged. At 9:00 this morning 30 yr mortgage prices were down 10 bp and the 10 at 1.78% +1 bp. As yesterday, there are no scheduled data this morning, at 3:00 this afternoon March consumer credit data will be released. At 1:00 Treasury will auction $32B of 3 yr notes.

Markets still focused on the April employment report last Friday. The stronger report has, at least for the moment, increased concern that the Fed may begin taking the QE away sooner than what was thought prior to the report. Before the employment report the general consensus had been that the Fed would continue the QE through the rest of this year. That view was mostly based on the weaker economic reports on March and April data; most of the key data over the past month has been disappointing. Now after April employment report the debate within markets is leaning more toward an earlier withdrawal. It is a moving target however, when we get more key economic data next week the outlook may be more clarified. That said, we are concerned about the magnitude of the increase in rates last Friday and no bounce yesterday or so far this morning.

The DJIA opened +22, NASDAQ +7, S&P +3; 10 yr note at 9:30 1.78% +1 bp, 30 yr MBSs holding n well -6 bp after being unchanged yesterday.

Not much news of substance this morning. German stock market it a new high this morning following the US key indexes; its factory orders in March were better than thought, orders up for the second month in a row. Good news for the US markets as well as Europe’s markets. Recent data from Europe’s strongest economy have been soft, similar to what we have here in the US. Orders for German exports rose 2.7% in March, with those from the euro area surging 4.2%, today’s report showed.

Recent Treasury auctions have not met with strong bidding; this afternoon $32B of 3 yr notes will be sold. Tomorrow its $24B of 10 yr notes, a more significant test of demand and directly impacting long term rates including mortgage rates. The 10 is continuing to weaken technically, now trading above its 200 day average for the second day. Also now above its 40 day average on the yield and the relative index is now in bearish territory. I doesn’t look good at the moment; the unusually strong selling last Friday suggests traders and investors holding 10 yr notes were not very comfortable with the low yield prior to the employment data. Since the employment report at 8:30 last Friday morning the 10 yr note rate has increased 15 bps. The present 1.78% was last seen on April 4th, it took a month for the yield to fall to the 1.63% low, it took a matter of hours to erase that gain.

The treasury market has had a big decline in rates recently, from 2.06% to 1.63% before the employment report. In the meantime the MBS market didn’t experience anything close to that kind of decline in rates. Now the treasury market is under strong pressure while the MBS market in comparison is holding well. Technicals on the FNMA 30 yr coupon are holding the key averages while the 10 is bleeding badly. Mortgages didn’t see the decline in rates while treasury rates were falling, now MBSs are equally not seeing the increase in rates.