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Market Update

7/20/2015

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The bond and mortgage markets under pressure to start the week. After last week’s Greek parliament voted to accept the creditors’ demands to increase austerity on Wednesday, Greece and the months-long daily dose of news quiet has descended on the region. Today Greek banks are now open after Greece agreed to pay €6.8B to creditors; money owed to the European Central Bank, the International Monetary Fund and Greece’s central bank. Banks can now replace the daily cash withdrawal limit of 60 euros with a weekly limit of 420 euros, though transfers abroad from Greek accounts remain banned. The Greek government still faces a parliamentary vote Wednesday on a second package of prerequisites for further financial assistance, including tax increases on farmers. Last week’s vote prompted some members of the Syriza party to rebel, forcing the Greek prime minister to reshuffle his cabinet on Friday. Greece’s problems haven’t been touched yet; sure the country agreed and the creditors agreed to provide bailout monies but the real point that hasn’t been faced head on yet is debt relief; as presently constituted Greece cannot now or in the future pay its debts.

 Not much in the way of data this week but what there is has teeth; June existing and new home sales. Last week the 10 yr note yield declined 7 bps to 2.34%, 30 yr MBS price +37 bps on the week. This morning in early trading the 10 started up 3 bps at 2.37% and 30 yr MBS price down 13 bps.

 At 9:30 the DJIA opened +22, NASDAQ +12, S&P +2. 10 yr at 2.38% +4 bps, 30 yr MBS price -17 bps frm Friday’s close and unchanged frm 9:30 Friday morning.

 How strong is the US economy? Ask 10 people and you would get 10 different views. The Fed touts the recovery of jobs as a reason to begin increasing the FF rate later this year. The Fed believes inflation is going to move to its long-held 2.0% target. Stock market investors while talking the talk are not walking the walk now, the key indexes are inching higher but compared to the bullish forecasts the movements don’t match the hoopla frm analysts and economists. Last week the NFIB (National Federation of Independent Business) released its June data, not as strong as the consensus is that growth is increasing:

 “OVERVIEW: SMALL BUSINESS OPTIMISM INDEX DROPS 4.2 POINTS”

“Another promising string of early in the year improvements in owner optimism was terminated in June, with the Index of Small Business Optimism falling 4.2 points to 94.1, well below the 42 year average.  It’s beginning to look like a bad habit.  Nine of the ten Index components fell, 1 was unchanged from last month.  Declines in spending plans accounted for 30 percent of the Index decline and weaker expectations for real sales and business conditions another 20 percent.  Earnings trends deteriorated, accounting for a quarter of the decline.  The job components accounted for 20 percent of the loss, as did the inventory components.  Actual reports of capital outlays rose, but plans to make outlays in the coming months declined.  Not a recession signal, but not supportive of an optimistic view of growth in the second half.

Owners in the “shale states” were more pessimistic or about the same as owners in non-shale states, depending on how “shale state” is defined.  There are interesting differences in the Index components."

PRICES @ 10:00 AM

10 yr note:                    -10/32 (31 bp) 2.38% +4 bp

5 yr note:                      -6/32 (18 bp) 1.71% +4 bp

2 Yr note:                     -2/32 (6 bp) 0.70% +3 bp

30 yr bond:                   -10/32 (31 bp) 3.10% +2 bp

Libor Rates:                 1 mo 0.190%; 3 mo 0.291%; 6 mo 0.460%; 1 yr 0.775%

30 yr FNMA 3.5 Aug:   @9:30 102.86 -17 bp (unch frm 9:30 Friday)

15 yr FNMA 3.0:          @9:30 103.34 -14 bp (+1 bp frm 9:30 Friday)

30 yr GNMA 3.5:         @9:30 103.58 -17 bp (+1 bp frm 9:30 Friday)

Dollar/Yen:                 124.33 +0.24 yen

Dollar/Euro:               $1.0839 +$0.0009

Gold:                          $1110.80 -$21.10 (five year low)

Crude Oil:                  $50.64 -$0.25

DJIA:                         18,076.89 -9.56

NASDAQ:                  5213.56 +3.41

S&P 500:                   2124.87 -1.77


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Market Update

7/17/2015

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The bond and mortgage markets were looking good prior to 8:30 when two key reports hit. June housing starts and building permits were both stronger than expectations; starts were thought to have increased 7%, as reported up 9.8% to 1174K units. Permits were thought to be down 6.5%, as reported permits jumped a huge 7.4% to 1343K units. It was all about multi-family though, up 29.4%; single family starts actually declined 0.9%. Multi-family permits increased 15.3%, permits for single family increased 0.9%. Still a concern that people are more willing to stay as renters rather than purchase a home.

 June CPI data was right on consensus estimates; overall +0.3%, the core excluding food and energy +0.2%. Yr/yr core +1.8%. CPI does get attention but as have noted previously it isn’t where the Fed looks, the Fed is focused more on the personal consumption index that is reported with GDP data.

The IMF out saying Greece’s debt should be re-structured to help insure Greece’s economy has a better chance of recovery and be able to pay its debt. That isn’t going over well with Germany though. Re-structuring the debt may feed to other cash strapped countries ask for debt restructuring. Is this going to be the next battle to erupt in the EU? The EU and the common currency was an experiment that appears to be going badly for a number of the countries that signed up.

At 9:30 the DJIA opened down 51, NASDAQ +29, S&P unch. The 10 at 9:30 up 1 bp to 2.36%, 30 yr MBS price -5 bps frm yesterday’s close and +14 bps frm 9:30 yesterday. Tech stocks including bio-tech continue to climb refuting Yellen’s thought that a bubble may be forming.

At 10:00 the U. of Michigan consumer sentiment index, expected at 96.0 frm 96.1 at the end of June. The index declined to 93.3; it is a mid-month read, why markets look at the end of the month as the significant reading is questionable. The decline is a decline; that said, as you know we don’t put as much attention to the consumer readings---too emotional, rather look at what consumers are doing rather than what they think.

The Fed continue to believe inflation will begin to increase soon to its goal of 2.0%; yesterday Yellen reiterated that thought in her testimony to the Senate Banking Committee. She and most all Fed officials are ‘certain’ inflation is just around the corner, although 2.0% isn’t much. That goes against what markets are thinking now. Global growth has slowed and prices are more likely to decline than increase as long as growth remains tepid at best. Global commodity prices have been declining over the last two months; China’s economy slowing, Europe’s economies with the exception of Germany are struggling and here although our economy is improving it is a slow growth path. Janet Yellen on Wednesday and Thursday said falling commodity prices and a stronger dollar were temporary. “My colleagues and I continue to expect that, as the effects of these transitory factors dissipate and as the labor market improves further, inflation will move gradually back toward our two percent objective over the medium term,” she said. Looking at the 5 yr note and the 5 yr treasury inflation-protected note, it has declined to 1.577%, the lowest since the end of May. It suggests investors expect U.S. inflation to be running at 1.577% on an annualized basis on average within the next five years. It was 1.667% at the end of June and this year’s peak of 1.863% on April 23.

Still no break from our bearish technical work but equally no selling. The Fed wants to begin increasing rates this year, but remains cautious about the strength of the economy. Yellen commented yesterday she wants to move but isn’t sure the economy, employment and inflation data warrant a move based on current data. She completely believes the economy, employment and inflation will improve as the rest of the year unwinds.

  PRICES @ 10:10 AM

10 yr note:                   +3/32 (9 bp) 2.34% -1 bp

5 yr note:                     -2/32 (6 bp) 1.66% +1 bp

2 Yr note:                    -1/32 (3 bp) 0.67% +1 bp

30 yr bond:                  +24/32 (75 bp) 3.07% -4 bp

Libor Rates:                1 mo 0.188%; 3 mo 0.287%; 6 mo 0.455%; 1 yr 0.773%

30 yr FNMA 3.5 Aug:  @9:30 102.88 -5 bp (+14 bp frm 9:30 yesterday)

15 yr FNMA 3.0:         @9:30 103.35 -4 bp (+9 bp frm 9:30 yesterday)

30 yr GNMA 3.5:         @9:30 103.59 -8 bp (-10 bp frm 9:30 yesterday)

Dollar/Yen:                124.08 -0.09 yen

Dollar/Euro:              $1.0861 -$0.0014

Gold:                         $1135.70 -$8.20

Crude Oil:                 $50.96 +$0.05

DJIA:                        18,061.66 -58.59

NASDAQ:                  5195.36 +32.18

S&P 500:                  2123.27 -1.02

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Market Report

7/16/2015

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As widely thought, the Greek parliament passed the austerity plan that the creditors were demanding. EU finance ministers approved a €7B ($7.6B) bridge loan to the country opening the path to a third bailout. The deal is expected to be officially announced tomorrow after other parliaments vote on the plan. The money will be used to make a €3.5B payment to the ECB on Monday; the money coming frm the ESM (European Stability Mechanism). Greek banks will get aid to re-open the banks. The EU is still working on safeguards to shield non-euro nations from Greek bailout risk. For the bridge loan to proceed, it needs approval from all 28 EU nations. Finance ministry deputies are planning to hold another conference call today with the intention of signing off on a deal by tomorrow. Safeguards for non-euro area nations will be needed to win support from the U.K., Denmark and others who’ve said they won’t approve an EFSM loan if their taxpayers are at risk. The German finance minister, still believing Greece should take a time out from the euro. His view that a temporary exit from the 19-nation euro region may be “the better way” since it would allow the debt forgiveness that is necessary yet banned under euro rules.

Finance Minister Euclid Tsakalotos said during the debate, “I don’t know if we did the right thing. But I know we did something to which there was no alternative.” “Nobody knows at the moment how this is supposed to work without a haircut and everybody knows that a haircut is incompatible with euro membership”. Look for a shake up now within the Greek government.

The global equity markets improving today on the Greek vote. The US markets have not shown much change after the vote yesterday; it was widely expected. The DJIA yesterday was about unchanged, this morning the index opened +68, NASDAQ +34, S&P +11. The 10 yr and MBS markets also rather calm this morning; the 10 at 9:30 2.39% +3 bps, 30 yr MBS price down just 13 bps frm yesterday’s close and +11 bp frm 9:30 yesterday.

Weekly claims this morning were right on estimates, -15K to 281K after increasing 16K the prior week.

Janet Yellen back to Congress, today at the Senate Banking Committee. She took heat yesterday frm the House committee on Fed policy, where rates are headed and the lack of congressional involvement in Fed actions and data. Likely she will be treated a little more civilly by senators but will grilled again.

Two data points at 10:00; July Philadelphia Fed business index, expected at 12.0 frm 15.2 in June, the report was soft, at 5.7. The July NAHB housing price index increased to 60 frm a revised 60 read in June (frm 59). The index is the highest since Nov 2005. The component gauging current sales conditions rose one point to 66 and the index charting sales expectations in the next six months increased two points to 71. Meanwhile, the component measuring buyer traffic dropped a single point to 43.

With the exception of four days since the beginning of June the bellwether 10 yr note yield has traded between 2.48% and 2.30%; a wide range but still holding mortgage rates in a narrow range with no significant increases. Our work remains bearish but not overly so. The longer outlook consensus is still bearish with the Fed expected to start normalizing rates at the Sept meeting.

 PRICES @ 10:15 AM

10 yr note:                   -5/32 (15 bp) 2.37% +1 bp

5 yr note:                     -6/32 (18 bp) 1.67% +3 bp

2 Yr note:                    -3/32 (9 bp) 0.67% +3 bp

30 yr bond:                  +2/32 (6 bp) 3.14% unch

Libor Rates:                1 mo 0.186%; 3 mo 288%; 6 mo 0.461%; 1 yr 0.772%

30 yr FNMA 3.5 Aug:  @9:30 102.73 -13 bp (+11 bp frm 9:30 yesterday)

15 yr FNMA 3.0:         @9:30 103.26 -10 bp (-4 bp frm 9:30 yesterday)

30 yr GNMA 3.5:        @9:30 103.70 -9 bp (+12 bp frm 9:30 yesterday)

Dollar/Yen:                124.02 +0.26 yen

Dollar/Euro:               $1.0888 -$0.0062

Gold:                         $1143.50 -$3.90

Crude Oil:                 $51.82 +$0.41

DJIA:                        18,068.27 +18.10

NASDAQ:                  5136.79 +37.85

S&P 500:                   2118.22 +10.82

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MARKET REPORT

7/15/2015

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Prior to 8:30 the 10 yr yield down 2 bps to 2.38%; 8:30 brought June PPI; the consensus was +0.3%, as reported up 0.4%, the core (ex food and energy) expected up 0.1%, it increased 0.3%. The whiff of inflation pushed the 10 yr to 2.43%, MBS prices down 16 bps frm yesterday’s close. Wholesale prices increased 0.5% in May, now another 0.4% increase in June. Yr/yr though wholesale prices are down 0.7%. June energy prices increased 2.4% as gasoline prices increased; food prices were up 0.6% (85% increase in eggs due to bird flu).

Janet Yellen is beginning her testimony to the House Financial Services Committee. In her prepared text she said the Fed was on a path to increase interest rates this year. “If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal-funds rate target, thereby beginning to normalize the stance of monetary policy.” Expect her to face tough comments and questions regarding the Fe’s independence; House re[publicans have been pushing for more Congressional scrutiny of the Fed---a bad idea as far as we are concerned. “Efforts to increase transparency, no matter how well intentioned, must avoid unintended consequences that could undermine the Federal Reserve’s ability to make policy in the long-run best interest of American families and businesses,” she is saying. On China; “China continues to grapple with the challenges posed by high debt, weak property markets, and volatile financial conditions.” Yesterday June retail sales were much less than expected, but she is emphasizing strong U.S. car sales in May and June as evidence that “many households have both the wherewithal and the confidence to purchase big ticket items.”

In Europe, waiting for the Greek parliament to vote on the creditor package. The vote isn’t likely until well into the evening tonight.

June industrial production expected up 0.2% increased 0.3%; production this year has had just two months out of six that saw an increase.  June factory use was also better than thought, at 78.4% frm 78.3% in May. Earlier this morning the July NY Empire State manufacturing index was expected up to increase to 3.5 frm -1.98 in June, it increased to 3.86.

PPI suggests inflation may be finally picking up adding to the idea of a Fed rate increase this year. The other data this morning also supporting that idea. Mortgage applications however, after a strong app reading last week declined, the composite index down 1.9%, purchase apps down 8.0%, refinance index did improve +4.0%. Put together, the purchase index has slipped 1.4% in the two weeks which is a negative signal for home purchases. According to MBA interest rates were unchanged on the week.  

At 9:30 the DJIA opened -18, NASDAQ +4, S&P -2. 10 yr at 9:30 -3/32 (9 bp) 2.41% +1 bp; 30 yr MBS price -5 bp frm yesterday’s close and -8 bps frm 9:30 yesterday.

Beside Yellen’s Q&A that will begin in less than an hour, this afternoon the Fed will release its Beige Book at 2:00 pm.  

Markets still focused on the EU and the Greek vote this evening, keeping the markets in narrow ranges this morning. Our technical work remains bearish but with underlying high levels of uncertainty that keeps volatility at high levels, as we noted last week, our technicals become less reliable than normal. A lot of opinions about the Fed, Greece and China but no strong convictions regardless of the perspectives and comments.

PRICES @ 10:00 AM

10 yr note:                    +1/32 (3 bp) 2.40% unch

5 yr note:                      -2/323 (6 bp) 1.67% +1 bp

2 Yr note:                     -2/32 (6 bp) 0.67% +2 bp

30 yr bond:                   +7/32 (22 bp) 3.19% -1 bp

Libor Rates:                 1 mo 0.187%; 3 mo 0.288%; 6 mo 0.463%; 1 yr 0.778%

30 yr FNMA 3.5 Aug:   @9:30 102.63 -5 bp (-8 bp frm 9:30 yesterday)

15 yr FNMA 3.0 Aug:   @9:30 103.23 -29 bp (-10 bp frm 9:30 yesterday)

30 yr GNMA 3.5 July:  @9:30 103.63 -2 bp (+3 bp frm 9:30 yesterday)

Dollar/Yen:                  123.87 +0.47 yen

Dollar/Euro:                $1.0956 -$0.0053

Gold:                           $1146.80 -$6.70

Crude Oil:                   $52.27 -$0.77

DJIA:                          18,044.76 -8.82

NASDAQ:                   5119.06 +14.16

S&P 500:                    2109.27 +0.32

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