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Market Update

8/19/2015

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The bond market opened about unchanged, MBS prices early on were better by 6 bps frm yesterday’s unchanged close. 8:30 July CPI increased 0.1% against 0.2% expected, the core also +0.1% on 0.2% expectations. Yr/yr overall CPI +0.2%, yr/yr core +1.8%. Don’t read anything into the core yr/yr number, the Fed isn’t interested in it; the Fed uses personal consumption expenditures as its gauge of inflation and that data is up 0.3% well off the Fed target of 2.0%. MBS prices slipped and the 10 yr note increased 2 bps; not due to CPI but the FOMC minutes this afternoon.

 Minneapolis Fed President Kocherlakota in a WSJ column today warning the Fed should not increase the Fed funds rate this year with the 2.0% inflation target so far away. One of his premises is that doing it now with no inflation may send a message to markets that the Fed has lowered its 2.0% target set back in 2012. The Fed’s own internal outlook is 2.0% won’t be met until 2020. He said the outlook does not justify for policy tightening and may bring the Fed’s overall credibility into question. He suggests the Fed cut the rate for banks parking money at the Fed, forcing banks to turn more to lending. That idea was floated over the last few sessions, negative interest rates at the short end. Some believe it helped Europe when the ECB charged banks to park money at the central bank. According the Kocherlakota if investors begin to believe the Fed is lowering its 2.0% inflation target mortgage rates would increase, slowing an already slow sector in the feeble recovery. Kocherlakota is a voter on the FMOC this year. He said monetary policy itself poses the biggest danger to the economy.

 MBA released weekly mortgage applications this morning. Apps increased 3.6% overall, re-finances led the way, up 7.0% frm the previous week but purchases declined 1.0% frm the previous week. The previous week purchases were down 4.0%. Last week MBA reported July purchases were down 4.0% for the months compared to June. The refinance share of mortgage activity increased to 55.5 percent of total applications from 53.1 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.9 percent of total applications.  The FHA share of total applications decreased to 12.9 percent from 13.3 percent the week prior. The VA share of total applications decreased to 11.1 percent from 11.3 percent the week prior. The USDA share of total applications increased to 0.8 percent from 0.7 percent the week prior.  Data on housing has been a mixed picture recently; yesterday single family housing starts in July jumped 12.8%.

 
At 9:30 the DJIA opened down 126 points, NASDAQ -26, S&P -12. The 10 yr note ahead of the FOMC minutes this afternoon +2.bp to 2.22%, 30 yr MBS price -13 bps frm yesterday’s close and unchanged from 9:30 yesterday when prices were set.

 FOMC minutes hit at 2:00 this afternoon frm the July meeting. What message will be gleaned about a Sept rate increase? Markets presently see Sept as a toss-up but private economists see Sept as the date the Fed will do it. As a former trader I would suggest going with markets and ignore economists. Economists over a long period of comparing reality with their outlook have about a 35% success rate. The minutes could provide an update on the Fed’s internal debate about the inflation outlook, a key factor in their looming decision on interest rates. The minutes are three weeks old, in that time China de-valued its currency, oil and commodity prices have continued to decline, job growth has improved but job quality and wage increases are still a serious concern for Janet Yellen. As we noted her favorite wage gauge is the employment cost index. The ECI increased by 0.2% in the second quarter. That was not only way below what Wall Street was expecting, it was also the slowest pace of wage growth since 1982 when ECI record keeping started.

 As we have noted, our technical work has gone frm bullish to now just neutral. This afternoon’s reaction to FOMC minutes is key, the bellwether 10 yr at 2.21% is breaching a downtrend line and all of the momentum oscillators we monitor have lost all bullishness. Not yet bearish but at critical pivotal levels. Looking only at the underlying fundaments we don’t see a reason interest rates will increase much if our work would turn bearish. No inflation, a very weak stock market now, China slowing and will take the world with it. The dollar while stable now will increase on any belief rates are about to be increased taking the US economic outlook weaker.


PRICES @ 10:00 AM

10 yr note:                   -6/32 (18 bp) 2.22% +2 bp

5 yr note:                     -4/32 (12 bp) 1.60% +3 bp

2 Yr note:                    -1/32 (3 bp) 0.74% +1 bp

30 yr bond:                  -13/32 (41 bp) 2.88% +2 bp

Libor Rates:                 1 mo 0.202%; 3 mo 0.332%; 6 mo 0.529%; 1 yr 0.844%

30 yr FNMA 3.5 Sept:  @9:30 103.31 -13 bp (-2 bp frm 9:30 yesterday)

15 yr FNMA 3.0:          @9:30 103.40 -14 bp (+4 bp frm 9:30 yesterday)

30 yr GNMA 3.5 Sept:  @9:30 103.70 -8 bp (-3 bp frm 9:30 yesterday)

Dollar/Yen:                  124.42 +0.01 yen

Dollar/Euro:                $1.1028 +$0.0004 (unchanged)

Gold:                           $1122.40 +$5.50

Crude Oil:                   $42.13 -$0.49

DJIA:                          17,380.76 -130.58

NASDAQ:                   5029.14 -30.21

S&P 500:                    2083.04 -13.88

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August News letter

8/17/2015

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Market Update

8/17/2015

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Prior to 8:30 the bond and mortgage markets were essentially unchanged frm last Friday. At 8:30 the NY Fed Empire State manufacturing index, expected at +4.75, dropped to a huge decline down 14.92, the weakest since April 2009. New orders, which had already been weak in this report, fell from July's minus 3.50 to minus 15.70 for the weakest reading since November 2010. Backlog orders, which had also been weak, came in at minus 4.55 from minus 7.45. Shipments, in the weakest reading since March 2009, fell to minus 13.79 from positive 7.99. The initial reaction improved the MBS prices and took the 10 yr to 2.15% frm 2.19% on Friday. US stock indexes were about unchanged then on the report declined.


The NY Empire State report the stock indexes broke the back of indexes and boosted MBS prices; the DJIA opened 128, NASDAQ -26, S&P -12. The 10 yr note at 9:30 2.15% -4 bp and 30 yr MBS price +20 bps frm Friday’s close and +20 bps frm 9:30 Friday morning.

At 10:00 am the Aug NAHB housing market index, expected at 61 frm 60 in July was right on, buyer traffic increased frm 43 to 45; 50 is the line between contraction and expansion. Tomorrow housing starts are expected up 0.5% while permits are thought to have declined 9.0%.

Greece’s debt relief is increasing likely according to Angela Merkel in an interview yesterday. It will happen and markets have pushed its importance off the front page replaced by China’s economic downturn and its currency devaluation. Merkel said she fully expects the IMF will be an integral part of the debt relief and Greece getting the needed monies to pay the ECB; "I have no doubt that this will happen."

Factoid: The Fed has amassed $4.20 trillion in US treasuries that includes $1.73 trillion in mortgage backed securities in QEs since the 2008 financial market collapse.   The main events this week are July housing starts and permits, July existing home sales and the FOMC minutes. Our models remain slightly bullish. Last week a lot of volatility but on the week MBS prices were down just 12 bps and the bellwether 10 yr note yield up 2 bps to 2.19%. There isn’t an overwhelming bullish bias but also no emphasis to push rates higher. Still data dependent and the Fed is on the clock about when interest rates will be increased. Economists still holding to a Sept increase while markets more believing not until Dec. Best to go with markets and discount economists; economists don’t have a very good grasp of things since 2008, no history to work frm. These last two weeks of August have generally had little volume as investors and traders take a final summer breather before Labor Day; that increases volatility as we saw last week.

This Week’s Calendar:

         Today,

            8:30 August Empire State (+4.75 expected, as reported -14.92)

           10:00 am August HAHB housing market index (expected at 61 frm 60 in July, as reported

        Tuesday,

           8:30 am July housing starts and permits (starts +0.5% to 1180 units; permits -9.0% to 1230K units)

        Wednesday,

          7:00 am weekly MBA mortgage applications

          8:30 am July CPI (+0.2% overall and +0.2% for the core)

          2:00 pm FOMC minutes frm the July meeting

       Thursday,

         8:30 am weekly jobless claims (-4K to 270K)

        10:00 am July existing home sales (-2.7% to 5.40 mil unit annualized frm 5.49 mil in June)

          August Philadelphia Fed business outlook (7.5 frm 5.7 in July)

          July leading economic indicators (+0.2% frm +0.6% in June)

PRICES @ 10:05 AM

10 yr note:                    +12/32 (37 bp) 2.16% -3 bp

5 yr note:                      +6/32 (18 bp) 1.56% -3 bp

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

30 yr bond:                   +21/32 (65 bp) 2.81% -3 bp

Libor Rates:                 1 mo 0.199%; 3 mo 0.324%; 6 mo 0.524%; 1 yr 0.844%

30 yr FNMA 3.5 Sept:  @9:30 103.55 +20 bp (+20 bp frm 9:30 Friday)

15 yr FNMA 3.0:          @103.58 -9 bp (-14 bp frm 9:30 Friday)

30 yr GNMA 3.5:         @104.19 +16 bp (+11 bp frm 9:30 Friday)

Dollar/Yen:                 124.32 +0.01 yen

Dollar/Euro:               $1.1095 -$0.0014

Gold:                         $1120.30 +$7.60

Crude Oil:                 $42.13 -$0.37

DJIA:                        17,387.64 +89.76 (40 points better than on the open)

NASDAQ:                 5033.47 -14.77

S&P 500:                  2083.45 -8.09

 

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Market Report

8/7/2015

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Yesterday we said we would take all bets that this morning’s July employment data would be well off the consensus estimates. Fortunately no one took me up on it; the jobs were right on the estimates. Non-farm jobs +215K, private jobs +205K. The unemployment rate unchanged at 5.3%, average hourly earnings +0.2% to $24.99 and up 2.1% yr/yr, the labor participation rate 62.6% unchanged frm June, the lowest level since 1977 and U-6 unemployment at 10.4% (10.5% in June) the lowest level since June 2008. The previous two months were revised to add 14K more jobs than what had been reported. Most growth was in the service sectors but manufacturing added 15K jobs.

 The employment report didn’t move the bond or mortgage markets on initial reactions. The 10 yr note yield did increase 2 bps but by 9:00 back to unchanged frm yesterday, MBS price dropped 14 bps on the knee jerk but at 9:00 also unchanged. US stock indexes saw some selling. The report this morning about cements it that the Fed will increase the FF rate at the Sept meeting; subject to change of course On every key data point. Good to get it over and end this month’s long on again off again debate within the markets.

 No inflation on the horizon, in fact there is more concern of prices continuing to deflate than stabilize. Led by the decline in oil prices all commodities continue to lose value, driven lower by global slowdown frm Asia to Europe. The US equity market continues to look vulnerable to more selling. Combined, the two things are supporting lower long term rates as investors increasingly concerned that stock indexes will continue to decline in the near term.

 At 9:30 the stock market opened weaker; the DJIA -52, NASDAQ -20, S&P -5. If the equity market closes lower today it will be the seventh day in succession that the key indexes have fallen. The soft equity markets driving money into safety in long dated treasuries and adding support in the mortgage markets. At 9:30 the 10 yr note yield down 1 bp point to 2.21% and MBS price on conventionals +11 bp frm yesterday’s close and up 20 bps frm 9:30 yesterday. FHA and VA prices at 9:30 were unchanged  frm yesterday and +5 bp frm 9:30 yesterday.

 The yield curve is flattening; rates at the short end moving up while at the long end holding and even declining. The flattening is pointing to an increase in the FF rate currently expected to occur in Sept. The equity market not sure what the impact of higher short term rates will have on the economy. So far this week the 10 yr note yield up 2 bps frm last Friday, 30 yr MBS price -12 bps. The 2 yr at 0.75% up 7 bps this week and the 5 yr note +9 bps.

 Through this week our technicals remain positive for the long end of the curve (10s and MBSs). Although prices have been supported at key selling points the bullishness is can’t be taken too seriously. No matter what stance we take it is tenuous. Most of the rate market improvements this week has been in the 30 yr bond, parking money there provides the best yield. This week the 30 yr bond yield has dropped 5 bps. Overall this week rate markets haven’t moved much from last week’s closes.

PRICES @ 10:15 AM

10 yr note:                   +3/32 (9 bp) 2.21% -1 bp

5 yr note:                     -1/32 (3 bp) 1.62% +1 bp

2 Yr note:                    -2/32 (6 bp) 0.73% +2 bp

30 yr bond:                  +19/32 (59 bp) 2.87% -3 bp

Libor Rates:                1 mo 0.191%; 3 mo 0.311%; 6 mo 0.509%; 1 yr 0.835%

30 yr FNMA 3.5 Aug:  @9:30 103.69 +11 bp (+20 bp frm 9:30 yesterday)

15 yr FNMA 3.0:         @9:30 103.61 unch (+11 bp frm 9:30 yesterday)

30 yr GNMA 3.5:        @9:30 104.17 -2 bp (+8 bp frm 9:30 yesterday)

Dollar/Yen:                124.72 -0.02 yen

Dollar/Euro:              $1.0882 -$0.0043

Gold:                        $1093.60 +$3.50

Crude Oil:                 $44.39 -$0.27

DJIA:                        17,381.66 -38.09

NASDAQ:                 5045.92 -10.52

S&P 500:                  2079.11 -4.45

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