Market Update for 01-31-2012

Treasuries and MBS markets started flat this morning with stock indexes pointing to a better open at 930am.  At 830am Q4 Employment Cost Indexwas right on, up +0.4%, however no reaction to itr.  At 900am the November Case/Shiller 20 City Home Price Index declined 0.7% from October and down -3.4% year-to-year as expected…no reaction to it. 

In Europe at the EU summit most countries in the European Union agreed to tighter budget controls.  The EU completed a fiscal-discipline treaty that speeds sanctions on high-deficit states, requiring euro countries to anchor balanced-budget rules in national law.  Eight countries outside the euro backed the pact, while Britain and the Czech Republic boycotted it.  The meeting ended with German Chancellor Angela Merkel voicing frustration that Athens has failed to overhaul the Greek economy.  “Greece’s debt sustainability is especially bad,” Merkel told reporters.  “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”

Greece aims to complete debt-swap talks with bondholders this week.  Prime Minister Lucas Papademos told reporters after the summit that he is “strongly committed” to reaching a deal.  Meeting at the 16th summit in two years, they also agreed to bring the region’s permanent bailout fund, the European Stability Mechanism, into operation on July 1st, a year ahead of schedule.  As far as traders are concerned there was no progress on Greece and the EU summit was just another summit where a lot of talk and no direct action occurred; steps in the right direction but slower than a snail in molasses. 

UK consumer confidence improved in January according to gauge of sentiment it added 4 points from December to minus 29, the strongest reading since June.  The increase in confidence and the reaction to the EU summit improved equity markets in the UK and Europe adding some thrust to U.S. markets early this morning. 

At 930am the DJIA opened up+55, the 10-Year Note down -2/32 at 1.85% unchanged and MBS prices -2/32 (.06 bp).

January Chicago Purchasing Managers’ Index,expected at 62.5 was unchanged from December; as released the index was lower at 60.2.  The New Orders component reported at 63.6 from 67.1, Prices Paid Index was 62.4 form 63.8 and the Employment Index reported 54.7 from 59.2.  There was no initial reaction to the data in the bond and mortgage markets but the key stock indexes backed off from the better levels prior to the report, still holding gains but lost about half of the improvement. 

The final data today, at 1000am, the Consumer Confidence Index for January was expected to have increased to 67.0 from 64.5 in December; it was weaker, at 61.1 from revised 64.8 in December.  Two economic releases that were less than expected pulled equity markets back and put support in the interest rate sector. 

The 10-Year Note is at a resistance level between 1.85 and 1.80%.  Most of the momentum oscillators are weakening a little but the wider perspective remains positive.

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Market Update for Monday 01-30-2012

The rally in the bond and mortgage markets is continuing this morning.  Europe stock markets are weaker and U.S. equity markets are set to open lower at 930am.  December Personal Income and Spending at 830am was in line with estimates; income up 0.5% against estimates of +0.4%.  December spending was unchanged against estimates of +0.1%; more evidence that holiday shopping didn’t meet those early lofty estimates.  Spending stalled in December as Americans used a jump in incomes to restore depleted savings, indicating the biggest part of the economy will not be a driver of the expansion. 

Last week Greek officials were “confident” that they could make a deal with creditors to fend off another debt default cliff.  Nothing happened.  Not necessarily a surprise as we have been subjected to the continual uncertainty and lack of progress for two plus years now.  Greece signaled opposition to economic oversight in exchange for aid, taking Italian interest rates higher this morning and driving equity markets lower.  European Union (EU) leaders gather in Brussels today for their first summit of 2012 to put the finishing touches on a German-led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year.  Greece and its private creditors said Saturday they expect to complete a deal in coming days after bondholders signaled they would accept a bigger cut in their debt holdings.  It never ends. 

The DJIA opened down -100; 10-Year Note up +17/32 at 1.83% (-7 bps) and MBS 30-Year prices up +6/32 (.18 bps). 

This week’s elephant is the January Employment Report on Friday.  Current estimates are an increase of 160K non-farm jobs and private non-farm jobs up +170K with the unemployment rate at 8.5%.  The actual unemployment rate is closer to 16% however, the “official” rate is 8.5% is evidence that many have simply dropped out of looking for jobs.  Until the Federal Reserve revised estimates for growth downward for 2012 and 2013 last week and Q4 GDP advance report was weaker than forecasts (up +2.8% against +3.1% expected) there was an increasing belief the economy was gaining a little momentum.  Now economic bulls are re-thinking that idea.

The bellwether 10-Year Note is working on a key resistance level at 1.80% this morning.  In early trade it dropped to 1.82% and at 1000am was sitting at 1.83%.  The MBS’s are pushing into new highs in prices not seen in over a year.  The Federal Reserve’s decision to leave the FF rate at 0.0% for the next three years and with no inflation now or on the horizon, the long end of the curve is seeing buying as investors seek yield.  The safety trade over Europe’s debt crisis has ebbed recently but still plays a role in the decline in rates.

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Market Update for Friday 01-27-2012

Before 830am the treasury markets were trading slightly weaker and stock indexes a little better, it changed after the 830am release of Q4 GDP which anticipated a growth rate of 3.1% and reported +2.8%; the 10-Year Note bounced up a little and mortgage prices improved and stock indexes declined.  The report is the first of three over the next three months and usually gets revised when the preliminary report hits next month.  Nevertheless after the Federal Reserve released its weaker forecasts for growth in 2012, and 2013 on Wednesday the softer Q4 growth is getting a lot of attention this morning.  If inventory builds are removed GDP was up just 0.8%.  For all of 2012 growth up 1.7% compared with +3.0% in 2010.  Consumer spending in Q4 was up 2.0%, economists were projecting +2.4%, Q3 up 1.7%…holiday shopping was less than estimates. Q4 savings rate declined to +3.7%, the lowest in years.

 The bond and mortgage markets rallied a little on the 830am weaker GDP data.  MBS trading was volatile with prices swinging from +.22 bps to +.09 bps; at 915am +.09 bps with the 10-Year Treasury +4/32 at 1.93% -1 bps.   At 930am the DJIA opened down -36, the 10-Year Note up +6/32 to 1.92% (-2 bps) and mortgage prices +3/32 (.09 bps).

 The final data this week at 955am, the University of Michigan Consumer Sentiment Index,expected at 74.0, as reported 75.0, up from 69.9 at the end of December.  Current conditions at 84.2, expectations at 69.1 from 68.4 two weeks ago, 12-month outlook 82 from 79 two weeks ago.  The sentiment and current conditions are the highest since February 2011.  There was no reaction to the data in either stock indexes of the bond markets.

 European Union Economic and Monetary Affairs Commissioner Olli Rehn said authorities are “very close” to reaching an agreementon a private-sector involvement in a Greek debt swap this month.  Greece and its creditors are haggling over the terms of an accord to reduce the country’s borrowings, three months after private bondholders agreed to a 50% cut in the face value of more than 200 billion euros ($263B) of debt by voluntarily swapping bonds for new securities.  Earlier this week officials were saying a deal would be resolved by today, now the talk is “in the next three days”.

 Technicals are looking more bullish,the 10-Year Note has more to go before it runs into resistance.  The rest of the day the bond and mortgage markets will take their lead from the equity markets, stock indexes at 1000am at their worst of the day so far.

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Market Update for Thursday 01-26-2012

The bond and mortgage markets opened better this morning,still reacting to the Federal Reserve’s surprise yesterday saying the FF rate would stay at 0.00% to 0.25%, clear out to the end of 2014.  Prior to yesterday the Federal Reserve was saying mid-2013.  The motivation is that the central bank has lowered its forecasts for U.S. growth this year and next.  Bernanke apparently is more concerned about growth that he was six weeks ago.  The recovery seen so far he considers anemic with unemployment to remain high for another two years, the housing sector showing little in the way of stabilizing let alone improving much, and he is very likely believing Europe will decline into another recession and that there will be defaults on a lot of the debt piled up.

 The reaction to yesterday’s FOMC Statement and Bernanke’s press conference was swift;U.S. Treasuries that were looking weak rallied taking the 10-Year Note to 2.00%, down -6 bp yesterday on the close, but at 1.92% on the initial reaction.  MBS prices spiked initially then backed off but still a very nice close, up +16/32 (.50 bps).  This morning treasuries are better as are MBS prices; at 900am the 10-Year Note at 1.98% (-2 bps) and MBS prices up +8/32 (.25 bps).  U.S. stock indexes at 900am: DJIA up +65; all major equity markets in Europe rallying on the Federal Reserve’s rate surprise.  At 930am the DJIA opened up +44, the 10-Year Note up +12/32 to 1.96% (-4 bps) and MBSs up +10/32 (.31 bps).

 At 830am Weekly Jobless Claimswere in line with forecasts, up +21K to 377K; Continuing Claims up +88K to 3.554 mil.  December Durable Goods Orders were much stronger than estimates.  Expectations were for an increase of 2.2%, reported up 3.0%.  The more significant excluding transportation orders were expected up 0.7%, reported up 2.1%.  November Orders were revised higher, from 3.8% to +4.3%, excluding transportation from 0.3% to +05%.  The two reports added a little more strength to the stock indexes in the futures markets.

 

More data at 1000am December New Home Sales were expected to increase 1.5% to 320K annualized units, actually declined 2.2% to 307K.  Based on sales there is a 6.1 month supply and for all of 2011 sales were down 6.2%.  December Leading Economic Indicators were expected to be up +0.7%, reported up +0.4%, November revised to up +0.2% from +0.5%.  No immediate reaction to the data.

 This afternoon at 100pm the Treasury will complete its auctions with $29B of 7-Year Notes.  Yesterday’s 5-Year Note auction met with solid demand. 

 The slightly bearish bias in the bond and MBS markets turned quickly yesterday on the Federal Reserve’s announcement.  Prior to the announcement we were thinking the 10-Year Note would climb to 2.15% but go no further; the highest it got was 2.09% on Tuesday.  Now the obvious questionis, how low will the 10-Year Note yield go based primarily on the Fed holding the FF rate at current lows until the end of 2014 and how low willmortgage rates go now?  It is unlikely U.S. interest rates will decline to new lows.  At this point we expect the wider trading range will continue with the possible low on the 10-Year Note at 1.80% and mortgage rates tied to a 25 basis point range in rates.  The Federal reserve is worried about the U.S. recovery and that Europe will continue to decline with eventual debt defaults in Greece and other EU countries.  Until there is another Europe shock it is unlikely that U.S. rates will push to new lows.  It will take a few days for traders and investors to assess the message sent yesterday from the Federal Reserve when the Committee made such an unusual move.

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Market Update for Wednesday 01-25-2012

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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Market Update for Tuesday 01-24-2012

Treasuries and MBSs opened a little better this morning, ending days of price declines.  The equity markets were trading lower early, implying a weak open.  There are no economic reports today, just the $35B 2-Year Note Auction.  Last month’s 2-Year, 5-Year and 7-Year Note Auctions were well bid however the 3-Year, 10-Year, and 30-Year Auctions didn’t get the demand traders were expecting.  Now with rates a little higher, demand will likely be better.  The 2-Year Note has been unchanged for the last few weeks at 0.24% and that is likely where the bid will be this afternoon at 100pm.

This evening the President will deliver his State of the Union address.  Being an election year the address will carry political overtones and not likely to generate much interest in the financial markets.  He will lay out what he calls a “blueprint” for revitalizing the economy, emphasizing a rebirth for U.S. manufacturing, bolstering domestic energy production and training workers.  The FOMC Meeting begins today, concluding tomorrow with the policy statement and Bernanke’s press conference after the meeting.  There’s speculation that the Fed will launch another quantitative easing move.  Every time the FOMC meets the idea surfaces.  With the Q4 GDP expected up 3.1% on Friday, almost doubling the growth in Q3, there isn’t much rationale for another easing unless it is targeted to purchasing more MBSs to keep mortgage rates from increasing.

In the never-ending soap opera known as Europe’s debt problems,yesterday markets were buoyed by reports out of Greece that talks were going well to arrive at a plan to forestall a Greek default.  Today there’s not much optimism with a stalemate between regional policy makers and Greek bondholders over how to resolve the nation’s debt crisis.  Bond holders are not willing to take the huge haircut demanded.  European finance ministers balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief.  Europe’s equity markets are weaker today, leading the U.S. market lower this morning.  The saga continues: On the positive side Spain’s 2-Year Note fell 5 bps to 3.12% as the government sold 2.51 billion euros ($3.3B of 3-Year and 6-Month Bills, meeting the maximum target for the sale.

At 930am the DJIA opened down -67, the 10-Year Note at 2.05% was unchanged but MBS prices rose +6/32 (.18 bp).  Prior to 930am the 10-Year Note held a 5/32 gain with its yield at 2.04%. 

Although the mortgage market is trading better this morning, the bellwether 10-Year Note is still struggling.  Even with equity markets weaker the 10-Year Note is not moving up in price.  Technically the 10-Year Note is slightly bearish on the near term outlook.  While we continue our outlook that rates won’t increase much unless there is renewed safety buying on news out of Europe, there isn’t any motivation to drive rates back down.  Given two years of fumbling and meetings in Europe to resolve debt issues, U.S. markets will remain vulnerable to any significant news from the region.  Presently markets are not as fearful of defaults or bank failures alleviating the need to park money in U.S. treasuries…the key word is “presently”.

 

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Market Update for Monday 01-23-2012

It wasn’t a good last week in the bond and mortgage markets withinterest rates up on increasing optimism that the U.S. economy can improve even in the face of Europe’s slide, and reduced need for safety in U.S. treasuries.  The 10-Year Note yield increased 15 bps last week and mortgage rates were up 8 basis points.  This morning early prices continue to fall as early activity pointed to a better open in the equity market.  At 830am the 10-Year Note was at 2.06%, up 3 bps from Friday’s close.  MBS prices at 830am were down -5/32 (.15 bp).  At 930am the DJIA was expected to open a little better, opened down a fraction (-8), the 10-Year Note traded at 2.07% -14/32 (-4 bps) and mortgage prices were dowm -8/32 (.25 bp).

There are no economic releases this week until Wednesday.  The week is focused on the Federal Reserve Open Market Committee (FOMC) meeting that starts Tuesday and ends Wednesday with the policy statement.  The Treasury will auction its monthly ration of $99B in 2-Year, 5-Year and 7-Year Notes.  The Eurozone of course is always in play these days and any significant comments from leaders of the EU, ECB and IMF will get traders’ attention.  Technically, the bond and mortgage markets, after last week’s selling, are now slightly bearish.  We talked about how the rate markets were losing momentum for the past two weeks, the break came last week.

“How high will interest rates climb” is the question now facing investors and traders.  We don’t believe rates will increase much, at worst the 10-Year Note could increase to 2.15% but should hold.  On the opposite side, it is very likely that the lows in rates have been put in place.  As long as the U.S. economic outlook is improving and there are no actual defaults in any Euro debt, there is little reason to justify the 10-Year Note going below 2.00% and mortgage rates at their lows of a few weeks ago.

Europe’s finance ministers are meeting today in Brussels,trying to advance plans to craft a long-term plan to tackle the region’s debt crisis, as banking and government negotiators continue trying to reach an agreement that will lighten Greece’s debt burden.  There has been progress over the past couple of weeks where Greece and private bondholders said they made progress in talks over the weekend in Athens.  Finance Minister Evangelos Venizelos said before today’s meeting that Greece is prepared to wrap up the private-sector debt swap on schedule.  “We have a very constructive cooperation with the private sector,” Venizelos told reporters in Brussels.  “We are ready to finalize the procedure on time.”

This Week’s Calendar:

01/24/12: 0100pm $35 billion of 2-Year Note Auction

01/25/12: 0700am MBA mortgage applications

1000am December Pending Home Sales (-1.0%)

November FHFA Housing Price Index (-0.1%)

0100pm $35 billion of  5-Year Note Auction

0215pm FOMC policy statement

01/26/12: 0830am Weekly Jobless Claims (+23K back to 375K)

December Durable Goods Orders (+2.2%, ex auto sales +0.7%)

1000am December New Home Sales (+1.5% to 320K units (annualized)

December Leading Economic Indicators (+0.7%)

0100pm $29 billion of 7-Year Notes Auction

01/27/12: 0830am Q4 Advance GDP (+3.1%)

0955am Universtiy of Michigan Consumer Sentiment Index (74.2 from 74.0)

The bond and mortgage markets have been losing strength for two weeks as indicated in past commentary.  The 10-Year Note won’t find much support until it hits 2.15% (now at 2.09%).  There aren’t many momentary concerns to hold treasuries against Europe.  U.S. economic outlook is improving thereby removing another support forrates.  There is some talk that the Federal Reserve may announce it will increase purchases of mortgageBacked Securities (MBS) to keep mortgage rates low, but as long as Treasury rates increase the best we can expect is that mortgage rates won’t increase as much, but will increase.  While we do not expect rates will fall again to the recent lows we are equally not expecting rates to move radically higher.

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