No Present Course

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Bernanke’s prepared text was out at 8:30 this morning (way early) before his 10:00 appointment at the House Financial Services Committee. He is saying that the central bank’s asset purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant. “If the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.” If the economy improved faster than expected, and inflation rose “decisively” back toward the central bank’s 2% target, “the pace of asset purchases could be reduced somewhat more quickly,” he said. The Fed “will be holding its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities,” Bernanke said. The strategy “will continue to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” On the text release the 10 yr note declined to its first key chart resistance at 2.50%, the 20 day moving average. MBS prices were generally unchanged prior to 8:30 but by 9:00 up 31 bps frm yesterday’s close. He didn’t say the Fed would continue top purchases, nor did he say the Fed was about to begin tapering. As it has always been it is data dependent and after his gaffe in May he has re-trenched to the bunker with Greenspan-like statements; keeping all options open and successfully stabilized the bond and mortgage markets. The Q&A frm the Committee will be critical pending how the questions are asked and how he responds; likely starting about 10:00 this morning. The release of the prepared text was in itself a surprise being so early. At 8:30 June housing starts were quite weak compared to forecasts. Starts were expected to up about 4.0%, as reported starts fell 9.9% to just 836K units annualized. The headline looks bad but most of the decline came in multi-family starts down 26.2%; single family starts were down 0.8% to 591K. June building permits were expected to be up about 3.0%, permits fell 7.5% t 911K units. Some of the decline in starts may have been due to very wet weather in June but that isn’t the real picture; the recent increase in interest rates is more likely slowing starts. A counter data point frm yesterday’s NAHB July housing market index that increased to the best level since Jan 2006. Weaker starts and permits is adding to the early improvement this morning. The weekly MBA mortgage applications were a little better last week as interest rates stabilized and declined a little. The overall applications index down 2.6% but purchases increased 1.0% for the first time in four weeks. The re-finance index fell 4.0% as rates moved higher and closed out those that sat there waiting for lower rates. The early release of Bernanke’s prepared text bolstered the bond and mortgage markets and drove the 10 yr note down to 2.47% at 9:30. The DJIA opened +21, NASDAQ +8, S&P +3. 30 yr MBSs +43 basis points. Finally, at least at the moment, the 10 yr and MBSs have broken their respective moving averages. Looks good for now but there is still concern that the Fed will begin tapering this year. Until this morning the general consensus was that the Fed would begin tapering by Sept. , for the moment that consensus is lessening in terms of the timing. Will House Committee members drive him to a more specific time frame? Likely they will try but Bernanke will keep the guessing going. The 10 at 2.47% is right where it traded when the June employment report was released; after climbing to 2.65% then backing to 2.47% the June employment report sent the 10 to 2.73%. Now back to that key 2.47% but slightly below its 20 da average. The 10 yr and 4.0 August FNMA coupon both now at very significant levels.