Archive → April, 2011
TGIF!!
The bond and mortgage markets continue to swing back and forth within a narrow range, yesterday the 10 yr note rate increased 4 basis points, this morning at 8:45 its yield down 4 bp. Mortgage prices fell yesterday 7/32 (.22 bp), this morning the price up 10/32 (.31 bp) at 8:45.
At 8:30 March consumer price index increased 0.5% in line with estimates, the core (ex food and energy) up 0.1% slightly less than 0.2% expected. Yr/yr overall CPI +2.7%, the core yr/yr +1.2%. Inflation concerns still the great debate with the Fed saying don’t worry be happy while markets are worrying and are not happy. Who wins? The Fed isn’t concerned that inflation in commodity prices will pass through to consumer prices, markets don’t like fading the Fed on such a key issue but evidence is increasing that businesses are beginning to pass price increases down the chain. Not yet a major issue but one that bears watching. Bernanke’s key word “transitory” describing inflation of commodity prices is keeping rates from moving higher but equally keeping rates from declining.
There is so much focus on inflation with global inflation increasing in Europe, China, India, Brazil, Russia and emerging markets that markets completely ignored the NY Empire State manufacturing data also out at 8:30 this morning. Normally the NY report gets attention even though it is a a small regional series, this morning it was as if it didn’t exist. The overall index was expected to have declined to 15.0 frm 17.5 in March, as reported it jumped to 21.7. The sub-components also stronger; new orders index 22.34 frm 5.81, prices pd 57.69 frm 53.25 and employment at 23.08 frm 9.09. On another day those improvements would have pressured rates and improved stock indexes; today there was no interest in it.
While we hold our outlook that interest rates will slowly rise by the end of the yr, the near term is looking a little better; that said as long as the 10 yr continues to be comfortable in its near term narrow 10 bp range (3.40% to 3.50%) showing no tipping of the balance; mortgage rates also stuck in their ranges and will remain there until the 10 yr breaks in either direction.
Holding rates steady is the increasing realization that Q1 economic growth will be far less than what markets were believing just two weeks ago. More economists and some Fed officials are cutting Q1 GDP estimates to 2.0% growth from 3.55 to 4.0% that had been prevalent. Looks more and more like the unfettered optimism that was the consensus just a week ago has now been rattled especially when we have Fed district Presidents out there down-playing economic growth; a key reason that inflation concerns may be waning. The Fed’s Plosser (Philly Fed) out this morning saying he isn’t worried about inflation for at least another year; likely he sees economic weakness coming—–we agree but with rates increasing globally the US won’t be able to easily fund the deficits at low rates.
At 9:15 March industrial production was expected up 0.5%, it increased 0.8% and factory utilization increased to 77.4% (the highest since August 2008) frm 76.9% in Feb. Both stronger than thought but there was no reaction to the data in the bond and mortgage markets. The stock indexes however have improved; early on the indexes were lower, at 9:20 the DJIA up 10 points and the S&P about unchanged (+1.5 points).
At 9:30 the DJIA opened +26, the 10 yr +19/32 at 3.43% -6 bp and mortgage prices +14/32 (.44 bp).
The final data point today; at 9:55 the U. of Michigan consumer sentiment index, expected at 66.0 frm 67.5, was 69.6, the current conditions index 82.7 frm 82.5, 12 month out expectations 75 frm 60; the 12 month inflation index was unchanged at 4.6. The rate markets got a minor boost on the data, so too the stock market—–a little for everyone in the data.
A couple of Fed speakers today; at 10:00 Alt Fed’s Evans, at 1:30 KC Fed Pres Hoenig, Hoenig is the Fed’s maverick wanting no QE and the Fed to begin thinking about tightening.
Listening and watching analysts, economists and politicians the take away is at the end of the day uncertainty is how most end their various forecasts. Not unusual to couch forecasts but recently the couching has taken on a higher level. Economic growth but at what pace? China, India, Russia, Germany, and emerging markets expanding at rapid rates; the US dragging along with more now revising growth lower than what had been though a couple of weeks ago. The bond and mortgage markets holding steady with little changes in interest rates over the past three weeks; we will continue our conservative approach to trading as long as our favorite 10 yr note sticks in its 10 bp range—no long positions, no shorting either—-sometimes its better to just watch.
Thursday Update
Prior to 8:30 this morning the 10 yr note traded slightly better with stock index futures weaker. At 8:30 weekly jobless claims were expected to have increased 3K but jumped 27K back above 400K to 412K; continuing claims however declined from 3.73 mil to 3.68 mil. The 4 wk average increased 5K. Also at 8:30 March producer price index was expected up 1.0%, as reported up 0.7%, the core excluding food and energy was expected up 0.2% but increased 0.3%. Yr/yr overall PPI +5.8% while the yr/yr core +1.9%, up 0.1% frm Feb.
The 10 yr note fell below 3.50% yesterday to 3.46% breaking the near term resistance, this morning after the 8:30 data the rate fell to 3.43% and mortgage prices at 8:45 +4/32 (.12 bp). The 10 yr technicals looking better after two weeks of selling and increasing rates. The stock index futures were pushed lower on the data this morning, at 8:45 the DJIA off 47. As long as equity markets stay weak the bond and mortgage markets will do better.
Obama’s call for raising taxes by focusing on spending in the tax code was immediately rejected by top Republicans, signaling that any effort to increase the government’s take from the economy would be difficult to move through Congress. What a surprise! Obama said he wanted Congress to overhaul the tax code by lowering rates, eliminating tax breaks and generating more money than the current system does. The plan would allow tax cuts affecting high-income taxpayers to expire at the end of 2012 and would raise $1T on top of that. As noted yesterday, the budget battle is hardly beginning. That said, the Presidents speech was overall a good one, well framing the issues but the chasm between those wanting more government and less is wider than the Grand Canyon. Obama set a June deadline for a bipartisan deal to cut the federal deficit and offered a path to get there that was designed to contrast with a Republican proposal he called unfair to the elderly and overly generous to the wealthy; it won’t likely be achieved though.
Crude oil, after hitting $113.00 last Friday is slightly lower this morning and has fallen to $107.00. Oil inventory levels were higher than traders expected when data was released yesterday. The decline in the price is mostly speculators heavily leveraged being forced out, but they will be back.
At 9:30 the DJIA opened down 50 points, the 10 yr off its best levels earlier, up 3/32 at 3.45% after touching 3.43%. Mortgage prices at 9:30 +2/32 (.06 bp) also falling back from levels at 9:00.
At 1:00 this afternoon Treasury will auction $13B of 30 yr bonds; yesterday’s 10 yr auction was OK but not strong bidding.
While the bond and mortgage markets have improved in the last few days, and the 210 yr note took out its near resistance at 3.50%, the 10 has a very critical resistance at 3.40%. Breaking the 3.40% level will need a continuing decline in US equities which doesn’t appear likely although recent selling in stock markets has increased concerns and shaken the strong optimism that has captured investors.
Wednesday’s Wash
Treasuries and mortgage markets rallied yesterday on weaker equity markets and Japan raising the disaster index to 7 on the nuke problems. This morning stock indexes, as they seem to do on any declines, are better pushing rate markets higher in yield. Yesterday the 10 yr note rallied nicely taking its yield down 8 bp to 3.50% where we noted resistance would occur, mortgage rates fell about 5 bp. Yesterday gold decline and crude oil fell $4.00, this morning in early trading gold up recovering all of the decline yesterday, crude up about $1.00 at 9:00. At 9:00 the DJIA +84 in pre-market trading after declining 117 points yesterday.
At 8:30 this morning March retail sales were generally in line with forecasts; up 0.4% overall and ex auto sales +0.8%. March sales were the weakest since June 2010; Feb sales revised to +1.1% from +0.7% ex auto sales. Excluding gasoline sales in March sales were up just 0.1%, in Feb ex gas up 1.1%. The rapid increase in gasoline prices as we have noted will cause a decline in consumer spending on discretionary items.
At 9:30 the DJIA opened +64, the 10 yr -11/32 at 3.54% +4 bp and mortgage prices -.18 bp frm yesterday’s close.
At 10:00 Feb business inventories, expected +0.8%, increased 0.5%; sales were +0.2% the lowest since June 2010, the inventory to sales ratio 1.24 months unchanged from Jan.
Earlier this morning at 7:00 am the weekly MBA mortgage applications for last week. Mortgage applications decreased 6.7% from one week earlier, weekly mortgage applications survey for the week ending April 8, 2011. The Refinance Index decreased 7.7% to its lowest level since February 11, 2011. The seasonally adjusted Purchase Index decreased 4.7% from one week earlier. The Purchase Index decreased 4.1% compared with the previous week and was 11.4% lower than the same week one year ago.
The four week moving average for the seasonally adjusted Market Index is down 3.3%. The four week moving average is up 0.7% for the seasonally adjusted Purchase Index, while this average is down 5.3% for the Refinance Index. The refinance share of mortgage activity decreased to 60.3% of total applications from 61.2% the previous week. This is the lowest refinance share since May 7, 2010. The adjustable-rate mortgage (ARM) share of activity decreased to 5.9% from 6.1% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased for the fourth consecutive week to 4.98% from 4.93%, with points increasing to 0.93 from 0.69 (including the origination fee) for 80% loans. This is the highest average contract rate reported since February 18, 2011. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.17% from 4.14%, with points increasing to 1.22 from 1.09 (including the origination fee) for 80% loans. The effective rate also increased from last week.
At 1:00 this afternoon Treasury will auction $21B of 10 yr notes; yesterday’s $32B of 3 yr notes went OK, like the Three Bears—not to hot, not too cool, just right. Today’s 10 yr should be decently bid but recent Treasury borrowing over the past few months has been a mixed bag, some auctions well-bid while others not so strong.
At 1:30 the President is going to lay out his sketchy ideas for cutting the budget deficit. Likely he will not want to cut entitlements, the path for Democrats to regain power. The budget battles are going to be contentious between Republicans and Democrats and will carry on through most of the summer. Regardless of how the cuts come and whether tax revenue increases occur, the end of it all will be another serious political miss. Our politicians are all about themselves and being re-elected; we do not expect a budget that will be meaningful until we have another election when our elected officials get the temperatures of the country—-again.
The Progressive Change Campaign Committee is calling for a “donor strike” by 2008 supporters of Obama if he puts Medicare and Medicare “on the table for potential cuts.” Obama is expected to discuss those programs during his speech this afternoon on ways to reduce the federal debt. Conservative Republicans, meanwhile, are already criticizing Obama’s planned speech for proposals to eliminate tax loopholes, and end George W. Bush-era tax cuts for wealthy Americans. It is going to be a real Cluster…
And finally today; at 2:00 the Fed will release its Beige Book on the economy from the 12 Fed districts.
With the Pres speaking at 1:30 and the Fed’s Beige Book at 2:00 the financial markets will likely not move much this morning. The bond and mortgage markets are technically bearish but as we have noted we are not expecting a spike higher in rates, rates will increase through the rest of the year as long as the economic outlook continues to be positive. That said, the IMF lowered their estimates for growth in the US from 2.0% to 1.5% this year, and lowered growth rates for Europe and Asian economies. The lowered forecasts have opened the door for those that are not so optimistic. A change in the outlook would of course support the rate markets as investors exit equities, that however, at least at this time, isn’t the consensus.
Tuesday Trivia
Treasuries rallying this morning on lower equity market trade and another slight run to safety on news that Japan has elevated the condition level on its nuke sites from a 5 to a 7, the same level as Chernobyl in 1986. Officials however are saying the level of radiation leaks is much lower than Chernobyl, still an increase to the highest level for nuke accidents. Also supporting rate markets; in the UK inflation levels slipped a little as is also the case on recent data from Mexico. In Germany investor confidence slid on ECB rate increase last week; German inflation unexpectedly accelerated to 2.3% last month after oil prices surged to more than $110 a barrel. (crude has declined $7.00 in the last 24 hours)
More not so good news for the economic outlook this morning. The National Federation of Independent Business index fell. “It looks like everyone became more pessimistic in March, consumers (The university of Michigan Confidence Index took a dive, tenth largest monthly decline in survey history) and business owners. The Index of Small Business Optimism gave up 2.6 points in March, falling to 91.9, definitely a recession-level reading if history is any guide.”…. ”The bad news for the Fed (although not for the business owners who need to improve their bottom lines after the recession laid waste to their profits) is that price pressures continue to mount. The decline in the Index was driven by weaker expectations for real sales gains and business conditions and a marked deterioration in profit trends. Job creation plans weakened but remained in positive territory and plans to make capital outlays posted another gain (although reports of actual outlays over the past 6 months were unchanged). Basically, the Index and its components are at recession levels from an historical perspective.”
The Feb international trade deficit was about in line; -$45.76B. March import prices increased 2.7%, higher than 2.2% expected; export prices +1.5% higher than +0.8% expected. Food prices up 4.2% the largest increase since July 1994; yr/yr import prices up 9.7%. Yr/yr on export price +9.7%.
The DJIA opened -88, at 9:30 the 10 yr +19/32 at 3.52% -6 bp and mortgages +12/32 (.27 bp). Equity markets were not happy over the Alcoa earnings reported at 4:00 yesterday, the beginning of earnings season. Cisco also not helping equities with news of the company about to cut jobs.
The reactions to weaker earnings, a decline in small business confidence, Japan increasing the nuke emergency level from 5 to the highest 7 level, a sizeable decline in oil prices in the last 24 hours (about $7.00), and lower inflation stats from the UK have momentarily shaken markets. Not a big deal in the larger perspective but enough to pressure stocks for the moment and push interest rates slightly lower this morning.
At 1:00 Treasury will auction $32B of 3 yr notes. At 2:00 this afternoon Treasury will report the March balance, expected a deficit of $189B.
A nice start to the day but we are not swayed, the bond and mortgage markets if we look at it from the technicals are both near term oversold as we noted yesterday; the equity markets equally overbought. Both markets overdue for consolidation. The larger picture remains optimistic fore economic recovery, inflation concerns haven’t evaporated as most countries are on a path of rate hikes. Then the much wider perspective; the US budget deficit that will play a huge role in the markets starting again tomorrow after Obama’s speech. None of the driving issues justify optimism in the bond markets.
Monday Minutia
Last week there wasn’t much direct news for the bond and mortgage markets. Interest rates increasing around the globe, no economic reports of consequence and politicians working on a budget to fund deficits through the end of 2011 fiscal year (Sept). The rate markets last week saw the 10 yr yield increase 12 bp, mortgages up 6 bp.
At the 11th hour (literally) the Congress and the Administration agreed on a budget, avoiding a government shutdown. The media made a huge deal out of the inability of Republicans and Democrats to agree, markets however were generally convinced the shut-down would be avoided.
Treasuries and mortgages started the day about unchanged from Friday, a couple of ticks weaker; in pre-market trading the stock indexes were higher and at 9:30 the DJIA opened better (+20) Mortgage prices were down 2/32 (.06 bp) prior to 9:30 but improved a little to +2/32 (.06 bp) . Last week the DJIA up 3 pts, NASDAQ -9, and the S&P -4. Today there are no economic releases for markets; through the week however we will get more data than last week.
Starting tomorrow afternoon Treasury will auction $66B of notes and bonds, recent borrowing demand from investors has been a little soft so demand will be closely watched. Wednesday Pres Obama will speak and release the administrations 2012 budget; politicians had a difficult time over the past few weeks agreeing on a budget for the rest of this year. The 2012 budget battle will make the recent budget battle look like children’s play. Cuts in entitlements will be difficult to get agreement but it is necessary to cut them; Medicare and Medicaid and likely talks of revenue increases. Recall Obama extended the Bush tax cuts this year, that isn’t likely to happen next year so taxes for many will increase just on that alone.
This Week’s Economic Calendar:
Tuesday;
8:30 am Feb trade balance (-$45.7B)
Mar import and export price (N/A)
1:00 pm $32B 3 yr note auction
2:00 Mar treasury budget balance (-$189.0B)
Wednesday;
7:00 am Weekly mortgage applications
8:30 am Mar retail sales (+0.5%; ex auto sales +0.8%)
10:00 am Feb business inventories (+0.8%)
1:00 pm $21B 10 yr note auction
2:00 pm Fed’s Beige Book (report on the economy)
Thursday;
8:30 am weekly jobless claims (+3K to 385K; con’t claims 3.70 mil frm 3.723 mil)
Mar producer price index (+1.0%, ex food and energy +0.2%)
1:00 pm $13B 30 yr bond auction
Friday;
8:30 am Mar consumer price index (+0.5%; ex food and energy +0.2%)
Apr NY Empire State manufacturing index (15.0 frm 17.5 in Mar)
9:15 am Mar industrial production (+0.6% frm unch in Feb)
Mar capacity utilization (77.4% frm 77.0% in Feb)
9:55 am U. of Michigan mid-month consumer sentiment index (66.0 frm 67.5)
Technically the bond and mortgage markets are a little oversold on a near term measurement, a little improvement is likely but the trend won’t change—its negative. The 10 yr managed a successful test of longer term support at 3.60% on Friday and fell back to close at 3.58%. We suggest using any improvements to lock loans about to close. The best we can forecast is the 10 may fall back to 3.50% at best. Treasury auctions should keep rates from declining much in the early part of the week.
This Week; the bond market has Treasury auctions to think about, $66B of notes and bonds beginning Tuesday. The Pres will speak on Wednesday to outline his 2012 budget after finally coming to agreements to increase the debt limit through the remainder of this fiscal year. Politicians debating the stop-gap measure last week could barely get it done, the 2012 budget battle will be much more of an issue with Medicare and Medicaid cuts that most believe will have to be happen. Besides spending cuts to improve the outlook for US debt there must also be revenue enhancements (taxes).
Economic data this week has a little more focus with March retail sales, PPI, CPI and a couple of reports on the manufacturing sector. Inflation concerns continue to increase everywhere except at the Fed with Bernanke believing the recent increase in raw prices and most all commodities as a transitory event and his concern that the US economy is still fragile. While that is the case, investors and the markets are moving out of fixed rate investments and into commodities especially gold as a hedge against what private markets increasingly believe, that inflation will get traction by the end of the year. The current consensus is that the Fed will not begin tightening until late this year or into next; there are however increasing numbers of analysts that are beginning to adjust to rate hikes sooner. By the time the Fed actually tightens markets will have mostly discounted higher rates. The bond and mortgage markets remain bearish, look for continued increases in rates over the next six months.
Friday – Opening Day At The Park!
Treasuries and mortgages under pressure early this morning with stock indexes looking better for the open at 9:30. At 9:13 the 10 yr -12/32 at 3.59% working to test 3.60%, mortgage prices at 9:15 -7/32 (.22 bp). At 9:30 the DJIA opened +35, 10 yr -12/32 3.59% and mortgage prices -.22 bp.
Crude oil continues to increase on unwavering concerns that oil supplies may be in some kind of jeopardy of decline although so far that hasn’t been the case as oil now setting another record. Gold higher also this morning as most (except the Federal Reserve) are increasingly concerned that inflation will edge higher. The Fed of course lead by Bernanke doesn’t believe inflation is now, or will be in the future, a problem. Within the Fed there are about as many opinions about ending QE or increasing the FF rate as there are officials which seem to multiply daily. Markets however are not as optimistic on the inflation outlook; inflation is increasing everywhere in the world except the US and it isn’t logical that US markets will accept Bernanke’s outlook.
The only thing today is the budget battle in Washington where the political misfits continue to argue over five-one thousandths of 1.0% of the total budget. Republicans, Democrats, the White House and tea party people cannot agree to make a $5B additional cut to keep the government from shutting down. Likely it will get done before a shutdown becomes necessary but we shiver at the prospect of our elected officials being able to deal with the budget in 2012 that will (or should) include increases in revenues and cuts in entitlement programs. As always is the case all of them will be more concerned with being re-elected than doing the peoples business.
At 10:00 the only data point, Feb wholesale inventories were expected up 1.0%, as reported up 1.0%; sales were however down 0.8% on expectations of being up 1.8%, the inventory to sales ratio at 1.16 month from 1.14 months in Jan. . This week there hasn’t been much in the way of economic measurements; inventories don’t get much attention from traders.
This morning the 10 yr note is testing 3.60%, the level that should hold the note at least for the day. If it gives way the next run will take it to 3.75% and push up mortgage rates another 15 basis points in rate. The rest of the day for the bond and mortgage markets will be watching the trade in equities; the DJIA opened +35 but within 10 minutes it slipped back to +17. All of our models and technical indicators are giving off bearish readings now.
Bad News for Consumers and the Mortgage Industry
The stay on the LO Comp rule going into affect was lifted late yesterday and we are now under the watchful eye of Big Brother. Ultimately this will shrink the mortgage industry and present fewer financing options for home owners and home buyers. Get ready for rising rates and higher costs for financing in the future. Click on the link below to see and hear more!
Important Information on the LO Compensation Rule
Tuesday Trivia
Treasuries and mortgages opened a little better this morning taking the 10 yr treasury down to 3.40% its near term resistance; the stock market indexes in pre-market trade were showing a lower opening. Mortgage prices up slightly at 9:00 about where they were at 9:30 yesterday; but by 9:15 mortgage prices were declining along with the 10 yr which once again failed at 3.40%. 9:15 30 yr mtg price -3/32 (.09 bp), the 10 -4.32 3.44% +1 bp. At 9:30 the DJIA opened -25, the 10 yr -5/32 and mortgage prices -5/32 (.15 bp).
Last night in a speech in Atlanta (Stone Mountain) Bernanke said that the recent rise in commodity prices will likely be “transitory” and prices will fall back. He went on to say though that the Fed must be watched “extremely closely,” encouraging bets that interest rates may be raised sooner than previously expected. The remark that commodity prices and energy prices will back down is somewhat surprising although he couched it with the famous comment that the Fed will watch and react accordingly if inflation creeps into end prices. Bernanke’s comments echoed his March 1 statement to lawmakers that Fed officials were “prepared to respond as necessary” to inflationary pressures. The Federal Open Market Committee, said following its March 15 meeting that it “will pay close attention” to the evolution of inflation and inflation expectations.
Bernanke’s comments in his speech shows the increasing division within the Fed about how long to continue keeping the FF rate at zero to +0.25% as it has since 2008; for the last couple of weeks one after another Fed officials have increasingly warned the US should end its tightening and begin to increase rates soon. Bernanke saying present inflation pressures in commodities and energy prices being “transitory” is his apparent response to the increasing concerns within the Fed. Bernanke remains convinced the economic recovery is not yet on solid ground, remarks like he made last night may be his way of jaw-boning the bond market from sending prices lower and yields higher. We don’t rally have to say it but, if rates increase even a little the depressed housing sector will be further constrained. Will the markets buy Bernanke’s “transitory” view about inflation? Back in the day he also said the sub prime mortgage markets were likely to be contained and managed. Is the US immune to inflation? Brazil, Russia, China, India, likely the European Union on Thursday and emerging market countries all increasing rates. Answer: No.
China increased its interest rates last night by 0.25% for the fourth time since the global financial crisis to limit the risk of asset price bubbles in the world’s fastest-growing major economy. The one-year lending rate will increase to 6.31% from 6.06% effective tomorrow. The one-year deposit rate will rise to 3.25% from 3.0%. On Thursday the ECB is widely expected to increase its base rate to head off inflation in the region which is now at +2.6% and higher than its 2.0% target rate on inflation.
Crude oil is lower today after reaching 30 month highs; with China increasing interest rates and oil supplies seen as increasing oil is a little lower today. That said, it is highly unlikely the demand for oil will decline regardless of increasing rates and China trying to slow its economy. Oil supplies won’t likely increase enough to offset the coming summer driving season and the Mideast oil world is far from stable.
The only economic report today; at 10:00 the March ISM services sector index expected at 59.5 frm 59.7. As released the index fell to 57.3; the new orders component 64.1 frm 64.4, prices pd at 72.1 frm 73.3 and employment at 53.7 frm 55.6. The repot not as good as was expected, the reaction is support the bond market and adding additional selling in equity indexes.
Two Fedsters out today: Kocherlakota of Minneapolis and Plosser of Philadelphia; (12;45 for Kocherlakota and 1:30 for Plosser)
Later today at 2:00 the minutes from the March 15th FOMC meeting will be released. Possibly a little more detail on the debate over QE and inflation expectations.
Once again the bellwether 10 yr, driver for mortgage rates, failed on its attempt to move below 3.40% this morning. The 10 has recently found a home trading between 3.40% and 3.50%, not much of a range but keeping mortgage rates stable. We remain bearish for the direction of interest rates on the wider perspective. For all of Bernanke’s confidence inflation won’t get a toehold, the Fed will end QE and the FF rate will likely be increased before the end of the 3rd Q.
Monday and More ………
No market moving news over the weekend, the 10 yr and mortgages opened better this morning after reversing and rallying a little on Friday. There are no economic releases today and this week is thin on measurements of the economy. The stock market is opening slightly better this morning but a little tedious. Later today (7:15 pm) Ben Bernanke will be speaking to the Atlanta Federal Reserve Bank Financial Markets Conference in Stone Mountain, Georgia.
Goldman Sachs out revising its outlook for Q1 from +3.5% to +2.5% and commented there are risks to the economic outlook. Goldman believes, as most now are coming around to believing, that the Fed will increase interest rates sooner than what had been expected. Most until recently were thinking the Fed would not increase rates until 2012 or later. Rates going higher around the globe, the US will be forced by inflation concerns and a stronger economic outlook to make the move before the end of this year. The Fed will likely increase rates in the 3rd Q unless there is a huge swing in the economic outlook.
Corporate profits have been the driver for the equity markets and the strong gains on the key indexes, going forward however it will be consumers that will set the tone. With crude oil making new highs almost daily these days and food prices likely to jump substantially over the next few months, will consumers have to retrench? Gasoline prices now over $4.00 in most of the country and escalating commodity prices it is reasonable to believe consumers will cut discretionary spending somewhat. Employment is improving yet still quite weak; the real unemployment rate when discouraged workers and those now with temp jobs are added back the true unemployment rate is at 15%.
Thursday the ECB will meet and will likely increase its base rate. The ECB has telegraphed its intentions to do so for the past two weeks and not likely to change. Not sure yet about the impact on US rates but with most major central banks increasing rates the likelihood that US rates will work lower is extremely high. German 10-year government bonds fell for an eighth day, the longest run of declines since June 2006, as speculation mounted the European Central Bank will increase interest rates
At 9:30 the DJIA opened +14, the 10 yr +5/32 at 3.43% -2 bp and mortgage prices +5/32 (.15 bp).
This Week’s Economic Calendar:
Monday;
7:15 pm Bernanke speaks
Tuesday;
10:00 am Mar ISM Services Sector index (59.5 frm 59.7)
2:00 pm Fed minutes from Mar 15th FOMC meeting
Wednesday;
7:00 am weekly MBA mortgage applications
Thursday;
8:30 am weekly jobless claims (-2K to 386K; con’t claims 3.70 mil frm 3.714 mil)
3:00 pm Feb consumer credit (+$2.5B, Jan +$5.0B)
Friday;
10:00 am Feb wholesale inventories (+1.0%)
The near term outlook for the rate markets will likely be choppy with not much decline but not much increase either. The outlook however is for rates to edge higher. The 10 yr has successfully held 3.50% twice last week, now a key near term support. As long as it holds mortgage rates will not creep higher but won’t decline either. The 10 has resistance at 3.40%, unless there a trend reversal in equities 3.40% will probably hold. The longer outlook for rates is for them to move up as long as the economy remains firm as it is presently.