The market opened generally quiet early this morning with treasuries and mortgage markets flat and stock indexes mixed at 900am. U.S. financial markets will not see much change this morning ahead of the 200pm Federal Open Market Committee (FOMC) Policy Statement and Bernanke’s press conference. The NASDAQ is the only index trading higher this morning, driven by the rally in Apple.
There are no changes or improvements over Europe’s debt mess. Greece is on the front burner now. On Monday there was widespread belief that Greece and its creditors would make a deal and avoid defaults. Yesterday the optimism waned as private investors (banks) refused to take the losses necessary to save the country. Today the ECB said it would not participate in any write-downs on the Greek bonds it holds, saying the central bank isn’t an investor, it bought the debt to aid Greece in an attempt to avoid default. To sum things up, nothing is being accomplished with Greece. International Monetary Fund Managing Director Christine Lagarde said today that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough. Investors and European finance ministers remain at odds over how much private investors should shoulder in the Greek bailout.
The U.S. bond and equity markets have largely become desensitized about momentary events and comments out of Europe. There is a slowly increasing belief in U.S. markets that eventually Europe will save itself and its currency; likely driven by the view that anything short of some acceptable plan would be a catastrophe to Europe and rest of the global economies. Safety moves into U.S. treasuries have ebbed and at the moment there is little motivation to move into treasuries, yet so far there is not much reason the dump fixed rate treasuries. The 10-Year Note yield has increased from 1.85% on 1/13/12 to 2.06% yesterday, mostly traders reducing exposure. MBSs also have increased in rate. Although rates have increased some as we noted they would, at the same time we do not expect interest rates to move much higher; our target for the bellwether 10-Year Note is 2.15% and no higher, worse case for mortgage rates, another 10 basis points in rates on 30-Year Notes.
Working against the bond market, less concern over Europe and improved U.S. economic outlook. Almost all the key economic reports in the past three months have beaten estimates. On Friday the Commerce will release the advance Q4 GDP and the consensus is +3.1%, up frm +1.8% in Q3. While the Fed will continue to keep short rates low as it has said repeatedly, the long end of the curve (10-Year Note) has seen its lows. There is an idea out there that the Fed may decide to increase its purchases on MBSs in an attempt to keep mortgage rates low, but if treasuries increase also, about all that can be expected is the yield spread between MBSs and treasuries will narrow. It is not likely that treasury rates would increase while mortgage rates fall.
At 1000am, a few minutes ago December Pending Home Sales(contracts signed but not closed) was expected down 1.0%, fell 3.5% with about a third of sales not going to the closing table; Year-to-Year Pending Sales were up 5.6%. November FHFA Housing Price Index expected down -0.1%, jumped 1.0%; -Year-to-Year was down -1.8%. There was no market reaction to the two housing reports.
U.S. rate markets will likely stay quiet through the morning and early afternoon ahead of the FOMC statement and Bernanke’s press conference this afternoon. At 930am the DJIA opened down -45, the 10-Year Note was unchanged and mortgage prices opened unchanged to slightly lower.
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