What's on the agenda for this week?
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Last Friday ahead of
the long Easter weekend, some glimmer of progress with the Russia/Ukraine situation
and a very firm Philly Fed business index
sent interest rates spiking higher with the 10 yr jumping to 2.72% up 8 bps
in yield. 30 yr MBS prices tumbled 51 bps. This morning the 10 is better and
MBS prices getting a little reprieve; at 9:00 the 10 at 2.70% with 30 yr MBS
price +17 bps. Over the weekend there was some gun fire in Ukraine with
separatists being shot by “unknown” gunmen; nothing serious however in terms
of markets. Markets remain subject to swings in sentiment about the Ukraine
news; last week for a moment when Russia, Ukraine, the US and EU met in
Geneva there was brief optimism that some progress might be in the offing;
four days later there has been gun fire, escalating renewed concerns. Rate
markets were hit very hard on Friday, this morning with less enthusiasm some
small improvements in the bond market.
The US 10 yr note on a
global comparison is yielding more than G-7 country averages. Treasury 10-year notes yielded 67 basis points more than their
counterparts last week, the most in four years; as the Fed unwinds its
bond-buying program while Japan and Europe consider additional purchases. The
Bloomberg Global Developed Sovereign Bond Index (BGSV) has gained 3.4% this
year, versus a 4.6% decline in 2013.
Where are those higher
interest rates that most everyone was forecasting this year? So far bets that rates would increase have come up losers as
the Fed is relentless in talking and doing things that have kept rates down;
good for mortgages and potential home buyers, but not many are buying into
the reality that higher interest rates are inevitable. How long the Fed can
enjoy the success of keeping rates at the present levels is a question that
big investors have gotten wrong so far this year. Differing comments from
Janet Yellen have kept interest rates tied in very narrow ranges now for the
last three months. At the March 19th FOMC meeting Yellen stirred the pot with
her remarks that after the end of tapering (expected in Oct) six months later
the Fed would begin increasing the FF rate; last week she back-peddled saying
the Fed was in no hurry to increase rates. The Fed’s new strategy? Keep them
guessing, keeping rates stabilized?
At 9:30 the DJIA opened quietly, +3, NASDAQ +7, S&P +1; 10 yr
note 2.70% -2 bp and 30 yr MBS price +14 although FHA price -16 bps.
Not much in the way of
market-moving news other than at 10:00 March leading economic indicators that
was expected up 0.7%; as reported up 0.8%; a very good number but given the
recent data not a surprise.
This week Treasury will auction $96B of 2s, 5s, and 7 yr notes (see
calendar). This week existing and new home sales along with the FHFA housing
price index are key data points, also March durable goods orders another
significant report. The Fed and ECB are increasingly worried that inflation
is not occurring as the banks’ expected by this time in the recovery. Mario
Draghi and Janet Yellen have increased outward concerns that the economies
still are soft enough to keep pricing pressures at bay.
When will interest
rates begin to increase? So far those that have
bet by now rates would be 25 bps higher than they are have taken sizeable
losses on that investment. Nevertheless, interest rates will increase of that
there shouldn’t be any doubt; when they will break out of the present long
narrow range is keeping traders on edge. We continue to expect the US stock
market will experience a significant decline, so far it hasn’t happened. If
our outlook is wrong rates are going to increase; if we are correct rates
will hold here and likely fall a little. That said, our primary focus is on
the near term outlook; rates for the present are not likely to change much in
the next few weeks.
This Week’s Economic
Calendar:
Monday, 10:00 am March leading economic indicators (as reported +0.8%) Tuesday, 9:00 am FHFA Feb housing price index (+0.3%) 10:00 am March existing home sales (4.56 million units -0.7%) 1:00 pm $32B 2 yr note auction Wednesday, 7:00 am weekly MBA mortgage applications 10:00 am March new home slews (455K units +3.3%) 1:00 pm $35B 5 yr note auction Thursday, 8:30 am weekly jobless claims (+8K to 312K) March durable goods orders (+2.0%, ex transportation orders +0.9%) 1:00 pm $29B 7 yr note auction Friday, 9:55 am U. of Michigan consumer sentiment index (82.6 from 82.6) |
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