Posts Tagged → Mortgage Rates
Quit Being Politically Correct By Calling it a “G” Fee, Say “Hello!” to Our New National Mortgage Tax!
The New Year has dawned and we can all rest peacefully during the months of January and February with the knowledge that HR 3765 is in firmly in place! For those of you that may be unaware, HR 3765 is the all important legislation that was passed to extend the payroll tax cut for 2 months. During these 2 months, our esteemed legislators will figure out a way to extend and finance the extension through the end of the year. Based on past experiences with this type of tactic (read budget deficit reduction) we can only imagine how entertaining the next 2 months will be!! But first, let’s take a look at how they financed the 2 month extension ……………
To make it clear and simple before the longer winded explanation, let me start by saying that our legislators slipped one by you during the holiday season! In essence, they have now implemented a National Mortgage Tax that will be in place in perpetuity as a means to pay for the 2 month extension. That’s right, they slipped one to you and you slept right through it!
This so called National Mortgage Tax (I’ll use NMT going forward) is disguised under the name of Guarantee Fee. You see, the bill mandates that all loans backed by Fannie Mae or Freddie Mac (87% of the conventional loan market in the US) are to be levied a guarantee fee of 10 basis points (.10) and that this fee will be a pass through from Fannie and Freddie to the US Treasury Department. What it means as far as your next mortgage is concerned is an increase of .125% in rate or and increase in .50% in point cost for the same rate you would have received for less. In other words, the before and after looks something like this:
Before the “G” Fee
4.000% @ 0.000 points
After the “G” Fee
4.000% @ 0.5000 points OR
4.125% @ 0.000 points
Either way, from this point forward and forever, the government will be collecting a TAX (they don’t call it that) in the form of this guarantee fee on any person that obtains a purchase or refinance mortgage that is backed by Fannie Mae or Freddie Mac. As I mentioned earlier, this currently represents 87% of all conventional mortgages funded in the US.
The fee is designed to be in place for 10 years (again to finance 2 months!) but rest assured that the check book is now open and this fee is never going away. The fee is already being priced into the market and while we have seen a strong rally on the MBS market it has not translated into lower rates as a result of this new fee. In dollars and sense, for a $400,000 mortgage you can either choose an additional $2,000 in cost or a monthly payment increase of $28.94 compared to the “pre” “g” fee world. That monthly payment difference equates to $10,418.40 out of pocket on a 30 year loan!
The speculation with all of this is that now that the portal for financing government costs or “tax cuts” is open with Fannie and Freddie, we will see more of this type of structure going forward. So a 2 month tax cut is really a permanent tax hike that is disguised by a different name! Lastly, the rumor mill also has it that the monthly MI factor on FHA loans will increase by the same 10 bps so consumers are not incented to choose FHA over conforming and upset the current balance of power between the 2 loan types.
So here is to 2012 and HR 3765! I can’t wait to see what they come up with as a way to finance the payroll tax cut for the remainder of the year!
January 2012 Economic Calendar
| Date | (GMT) | Event | Actual | Cons. | Previous |
| Jan 01 | 00:00 | New Year’s Day | |||
| Jan 03 | 15:00 | Construction Spending (MoM) | 1.2% | 0.5% | -0.2% |
| Jan 03 | 15:00 | ISM Manufacturing | 53.9 | 53.2 | 52.7 |
| Jan 03 | 15:00 | ISM Prices Paid | 47.5 | 47.9 | 45.0 |
| Jan 03 | 19:00 | FOMC Minutes | |||
| Jan 04 | 12:00 | MBA Mortgage Applications | -4.1% | 0.3% | |
| Jan 04 | 15:00 | Factory Orders (MoM) | 1.8% | 2.0% | -0.2% |
| Jan 04 | 21:00 | Total Vehicle Sales | 13.60M | 13.50M | 13.63M |
| Jan 05 | 13:15 | ADP Employment Change | 165K | 206K | |
| Jan 05 | 13:30 | Continuing Jobless Claims | 3.522M | 3.601M | |
| Jan 05 | 13:30 | Initial Jobless Claims | 375K | 381K | |
| Jan 05 | 15:00 | ISM Non-Manufacturing | 53 | 52 | |
| Jan 05 | 16:00 | EIA Crude Oil Stocks change | 3.899M | ||
| Jan 06 | 13:30 | Average Hourly Earnings (MoM) | 0.2% | -0.1% | |
| Jan 06 | 13:30 | Average Hourly Earnings (YoY) | 2.1% | 1.8% | |
| Jan 06 | 13:30 | Average Weekly Hours | 34.3 | 34.3 | |
| Jan 06 | 13:30 | Nonfarm Payrolls | 150K | 120K | |
| Jan 06 | 13:30 | Unemployment Rate | 8.7% | 8.6% | |
| Jan 09 | 20:00 | Consumer Credit Change | $7.65B | ||
| Jan 10 | 15:00 | IBD/TIPP Economic Optimism (MoM) | 42.8 | ||
| Jan 10 | 15:00 | Wholesale Inventories | 1.6% | ||
| Jan 11 | 12:00 | MBA Mortgage Applications | -4.1% | ||
| Jan 12 | 13:30 | Continuing Jobless Claims | |||
| Jan 12 | 13:30 | Initial Jobless Claims | 381K | ||
| Jan 12 | 13:30 | Retail Sales (MoM) | 0.2% | ||
| Jan 12 | 13:30 | Retail Sales ex Autos (MoM) | 0.2% | ||
| Jan 12 | 15:00 | Business Inventories | 0.8% | ||
| Jan 12 | 15:30 | EIA Crude Oil Stocks change | |||
| Jan 13 | 13:30 | Trade Balance | -$43.47B | ||
| Jan 14 | 13:55 | Reuters/Michigan Consumer Sentiment Index | 69.9 | ||
| Jan 16 | 00:00 | Martin L. King’s Birthday | |||
| Jan 17 | 13:30 | NY Empire State Manufacturing Index | 9.53 | ||
| Jan 18 | 12:00 | MBA Mortgage Applications | |||
| Jan 19 | 13:30 | Continuing Jobless Claims | |||
| Jan 19 | 15:30 | EIA Crude Oil Stocks change | |||
| Jan 25 | 12:00 | MBA Mortgage Applications | |||
| Jan 25 | 19:00 | FOMC Minutes | |||
| Jan 25 | 19:15 | Fed Interest Rate Decision | 0.25% | ||
| Jan 26 | 13:30 | Continuing Jobless Claims | |||
| Jan 26 | 15:30 | EIA Crude Oil Stocks change | |||
| Jan 31 | 14:00 | S&P/Case-Shiller Home Price Indices (YoY) | -3.4% |
Monday Minutia
This Week: economic releases beginning Monday and through Thursday will set the tone for financial markets. Recently there has been a renewed view the US economy is better than thought just a few weeks ago, the DJIA has now recovered all losses for the year. Interest rate markets are taking the hit on better outlooks and the belief that Europe’s debt mess will be contained—-hope is what we live with these days.
The first of the data out at 8:30 this morning, Oct NY Empire State manufacturing index, expected at -4.0 frm -8.82, as reported -8.48 indicating continued contraction. No initial reaction to the weak data.
Europe will continue to draw attention this week, it may not be obvious but under the radar and other driving events Europe is still unsettled. Last week markets were enthused on comments that the EU has com up with a plan that includes banks taking huge hits. Over the weekend the has been some push-back from Europe’s banks. Opposition from banks may hamper efforts by German Chancellor Angela Merkel and French President Nicolas Sarkozy to present a breakthrough at an Oct. 23 summit of euro leaders in combating the crisis, which has driven Greece toward default, roiled global markets and dented confidence in the survival of the 17- nation currency. In the end the situation is still unresolved and is unlikely to be resolved by Oct 23, the so-called date to have it all worked out. The significance is that as long as there is no actual resolution the US interest rate markets and the US equity markets will continue with their volatility.
Treasuries and MBS markets opened flat early this morning but got some support at 9:00 as stock indexes softened a little. Helping the bond market some this morning, the Oct NY Empire State manufacturing index expected -4.4 frm -8.82% in Sept was -8.48; the sub components were a little better but still very weak. At 9:15 Sept industrial production reported +0.2% right on the forecasts. Sept capacity utilization also in line, at 77.4% frm 77.3% in August. No initial reaction to the reports.
Europe will continue to draw attention this week, it may not be obvious but under the radar and other driving events Europe is still unsettled. Last week markets were enthused on comments that the EU has com up with a plan that includes banks taking huge hits. Over the weekend the has been some push-back from Europe’s banks. Opposition from banks may hamper efforts by German Chancellor Angela Merkel and French President Nicolas Sarkozy to present a breakthrough at an Oct. 23 summit of euro leaders in combating the crisis, which has driven Greece toward default, roiled global markets and dented confidence in the survival of the 17- nation currency. In the end the situation is still unresolved and is unlikely to be resolved by Oct 23, the so-called date to have it all worked out. The significance is that as long as there is no actual resolution the US interest rate markets and the US equity markets will continue with their volatility.
At 9:30 the DJIA opened -50, the 10 yr +9/32 at 2.22% -3 bps; mortgage prices at 9:30 +4/32 (.12 bp).
This Week’s Economic Calendar:
Today;
8:30 am NY Empire State index -8.48 frm -8.82
9:15 am Sept Capacity Utilization 77.4% frm 77.3%
Sept industrial production +0.2%
Tuesday;
8:30 am Sept PPI (+0.2%, ex food and energy +0.1%)
10:00 am Oct NAHB housing mkt index (14, unchanged from Sept)
Wednesday;
7:00 am weekly MBA mortgage applications
8:30 am Sept CPI (+0.3%, ex food and energy +0.2%)
Sept housing starts and permits( starts +4.0%, permits -1.5%)
2:00 pm Fed’s Beige Book
Thursday;
8:30 am weekly jobless claims (unch at 404K)
10:00 am Sept existing home sales (-1.8%)
Oct Philly Feed business index (-9.6 frm -17.5)
Sept leading economic indicators (+0.3%)
Treasury 10-year notes better, pushing yields down from the highest level in seven weeks, as concern Europe may take longer to contain sovereign debt turmoil boosted demand for the safest assets. We still believe the 10 yr note yield won’t increase past 2.30%; the high in the recent increase has been 2.27%. With continued concerns over how, or if, Europe can solve its debt issues US markets will continue to trade in swings on each comment out of the region. Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.
Although there is no way Europe can meet the Oct 23rd target that had been thought, markets still believe some kind of resolution, foreign investors in US bond markets are selling on that belief. The Federal Reserve reported its holdings of U.S. government debt on behalf of central bankers and institutional investors outside America has plunged $76.5B in the last seven weeks, the most since August 2007. At the same time, bond mutual funds are adding Treasuries, banks have increased their holdings 45% in the past five years and the Fed has added $656B to its balance sheet this year.
Technically the 10 yr note and MBSs are bearish at the moment.
Monday Update – Debt Crisis Averted, Lower Rates on the Horizon?
Headlines this morning, a debt ceiling deal was cobbled together over the weekend. The plan calls for cuts of $2.2T in spending and the debt ceiling increased $2.1T, enough to get past the 2012 elections. Leaders expect the bill will be passed by both the full House and Senate. The bond market so far isn’t too excited about the compromise, early this morning treasuries and mortgages have been hanging around unchanged from the strong rally Friday, the stock indexes in the futures markets prior to the 9:30 open were stronger on the reaction to the debt ceiling increase.
“The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” Obama said in an appearance in the White House briefing room last night as. “This compromise does make a serious down payment on the deficit-reduction we need. Most importantly, it will allow us to avoid default.” The House is expected to vote on the bill sometime today, markets will focus on how the rank and file members accept the compromise with the tea party freshmen in the House key to getting it passed. After it passes the House the Senate will likely vote later today or this evening. Both sides of the prolonged wrangling are finding fault with what was worked.
What will the rating agencies do with the compromise once it has passed the Congress? Questions remain whether rating agencies will cut US ratings. The rating agencies will not lower the US credit rating in our opinion; they were completely out to lunch on the sub prime mortgage crisis; lets hope they don’t mess up again. German bond yields were near the lowest in over two weeks amid concern a compromise deal on the U.S. debt ceiling won’t prevent a credit-rating downgrade of the world’s largest economy.
At 9:30 the DJIA opened +125, the 10 yr note -6/32 2.81% +1.5%; mortgage prices unchanged from Friday.
Data at 10:00; the July ISM manufacturing index, expected at 54.0 frm 55.3 in June, it took a huge dive to 50.9, the lowest index reading since July 2009 and adds to the confirmation that the economy is slipping quickly. The reaction sent the 10 yr note to 2.75% -4 bp and pushed mortgage prices +11/32 (.34 bp) on the session, up 12/32 (.37 bp) frm 9:30. The report sent the key stock indexes down hard, from +50 on the DJIA to -92 within three minutes of the 10:00 release. (see below for 10:10 prices)
June construction spending at 10:00, forecast unchanged from May, as reported up 0.2%.
This is employment week; Friday July employment data, the early estimates are for 84K non-farm jobs and 100K non-farm private jobs with the unemployment rate unchanged at 9.2%.
This Week’s Economic Calendar:
Today 10:00 am July ISM manufacturing index
June construction spending
Tuesday;
8:30 am June personal income and spending (income +0.1%, spending +0.1%)
2:15 July auto and truck sales (N/A)
Wednesday;
7:00 am weekly MBA mortgage applications (N/A)
8:15 am ADP July non-farm private jobs estimate (+100K)
10:00 am June factory orders (-1.0%)
July ISM services sector index (53.7 frm 53.3)
Thursday;
8:30 am weekly jobless claims (+7K to 405K)
Friday;
8:30 am July unemployment (9.2%, non-farm jobs +84K, non-farm private jobs +100K)
3:00 pm June consumer credit (+$5.0B)
Although all focus has been on the debt default debates in Washington, now that it appears they have once again dodged another political bullet it is time to turn back to the economy. The economic outlook is becoming less optimistic with each key economic report. Friday Q2 advance GDP report was much weaker than thought, up just 1.3% with most looking for +1.9%; Q1 GDP was revised from +1.9% to just +0.4% a huge slap in the face of the better economic outlook.
We continue to remain optimistic for interest rates as the economy slides back to the edge of a double dip recession.
This Week; over the weekend it appears there is a deal to avoid a debt default. Congressional leaders and the President came to a compromise as by know everyone is aware of. What isn’t clear yet is will the deal make it through the House after members actually see the plan that early this morning hasn’t been seen by most members in the House or Senate. The stock market will open better this morning on the news but the bond market isn’t likely to buckle much. So far there has been nothing from the rating agencies whether the deal is sufficient to avoid a downgrade of US credit rating.
Once the borrowing limit is increased markets can move back to focusing the economy. Today at 10:00 the July ISM manufacturing index and this afternoon auto and truck sales for July. This is employment week with July employment data on Friday. Expect continued uncertainty and potential market volatility this week as investors sift over the debt ceiling details. Prices of bonds and mortgages will continue to hold a bullish bias given the economic weakness and high unemployment. Whether we can hold the 10 yr at 2.75% area is not clear; it will take a few days for the entire agreed upon plan to be digested.
Monday Update
Treasuries and mortgages opened weak this morning; over the week-end no real progress with the debt ceiling increase as political gamesmanship continues. Democrats and the Pres want debt ceiling increase large enough to avoid having to deal with it next year ahead of the elections, while Republicans are trying to get a plan that increases the ceiling but only enough to get through several months then back to the debate.
The impasse has boosted the chance Standard & Poor’s will lower the U.S. credit rating from AAA within three months to 50%, according to PIMCO, the largest bond managers in the world. Mohammad El Erian said in an e-mail last week. “In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable,” …… “stock markets around the globe will look to price in a greater uncertainty premium on account of political squabbles in the world’s largest economy and the increasing risk that it may lose its sacred AAA rating.” Over the weekend there was a lot of concern that equity markets would fall hard frm Asia to Europe and in the US; the DJIA is opening weaker this morning but not nearly as bad as some were expecting.
The way the debating in Washington is proceeding it isn’t going to sit well with markets. The US interest rate markets are likely to begin factoring in a risk premium based on concerns that rating agencies may lower the US credit rating based on the reluctance of politicians to step up and make major decisions on increasing revenues and cutting spending. As it looks now what actually occurs will not satisfy rating agencies; at least that is the present fluid thinking. A rapidly moving target now with the deadline coming on rapidly making it questionable whether Congress can put it all together in time to avoid default.
No economic releases today; this week Treasury will auction $99B of notes. The Fed isn’t buying treasuries anymore but the auctions two weeks ago didn’t appear to be pressured as a result.
This Week’s Economic Calendar;
Tuesday;
9:00 am Case/Shiller May 20 city price index (-4.4%)
10:00 am July consumer confidence index (56.0 frm 58.5)
June new home sales (+0.4% to 320K annualized)
1:00 pm $35B 2 yr note auction
Wednesday;
7:00 am Weekly MBA mortgage applications
8:30 am June durable orders (+0.4%; ex transportation orders +0.5%)
1:00 pm $35B 5 yr note auction
2:00 pm Fed Beige Book
Thursday;
8:30 am weekly jobless clams (-3K to 415K; cont claims 3.688 mil frm 3.698 mil)
10:00 am June pending home sales (-3.0%; +8.2% in May)
1:00 pm $29B 7 yr note auction
Friday;
8:30 am Q2 advance GDP report (+1.6% frm +1.9% in Q1)
Q2 employment cost index (+0.5%)
9:45 am July Chicago purchasing mangers index (58.0 frm 61.1)
9:55 am U. of Michigan consumer sentiment index (63.8 unch)
Gold this morning making another record high as concern over the US credit rating possibly being lowered by the rating agencies.
Asian stock markets fell today, Europe’s markets also lower; at 9:30 the DJIA opened -96; the 10 yr note -13/32 3.01% and mortgage prices -9/32 (.28 bp).
Equity markets didn’t open as badly as many were expecting with no debt ceiling deal in place but the indexes are slipping a little from the 9:30 open, as they do fall the bond market is finding support. Although interest rates are higher this morning and prices lower on mortgages, if the stock market continues to slide as the day rolls on the bond market will likely improve. Conversely, any improvement in equity markets will push yields higher and prices lower. Technically the bond and mortgage markets are still not throwing off bearish reads but any more selling and the short term outlook will turn bearish. On the outlook for lower rates, we do not expect rates will fall much on any rallies. The 10 yr note has put in a double bottom on the yield chart, not a good sign. If the 10 yr note yield closes above 3.05% the next target would be 3.25% then 3.40%; mortgage rates will follow.
Thursday Trivia
Mortgage prices were under pressure in early trading. Equity futures were stronger prior to the opening as the problems in Europe seem to have moved to a more promising solution. At the opening of the stock markets the DJIA was higher but not as high as the futures were indicating earlier in the morning. Mortgage prices were down by 6/32, unchanged from earlier in the morning. The 10-year note yield is pushing the 3.0% mark, 2.99% at the stock market opening.
The unfolding talks in Europe over Greek debt have brought us a pending compromise whereby the ECB will allow Greece to temporarily slip into default as part of a broader agreement. The proposal involves a buyback of discounted Greek bonds to help Greece deal with the crippling effects of the current terms of their rescue. This agreement that is supported by Germany and France and the Dutch, is touted as the most promising way to get private investors involved in the second rescue package. The implications for a rescue package for Portugal, Ireland, and then Italy and Spain are perhaps looking better as the compromise over Greek debt comes to a head.
Economic news in Europe was weaker as the French and German equivalent to our PMI was reported close to contraction. In addition, China’s factory sector reported a contraction for the first time in a year. These are more signs that the global economy is slowing and that it will filter over to our economy as we have seen of late.
At 8:30am weekly jobless claims were reported up 10K to 418K for the week ending 7/16. Continuing claims fell to 3.698M from 3.748M for the week ending 7/09. The 4-week moving average fell by 2,750 to 421,250 claims. There was no market reaction to the rise in claims.
At 10:00am June leading indicators came in at +0.3% versus +0.8% in May meeting expectations. Equities rose and mortgage prices fell about 1/32.
The Federal Housing Finance Agency reported at 10:00am that home prices for May were +0.4% versus +0.8% in April.
Lastly at 10:00am The Philadelphia Fed Index for July came in at 3.2 on expectations of about a 2.5 read from June’s negative read of -7.7. Equity markets rose on the news and mortgage prices gave up about 1/32.
The big media event of the day centers around testimony on the Hill regarding the Dodd-Frank Bill 1-year after taking effect and the deal or compromise that Congress is proposing over the debt-ceiling deficit-reduction debate.
Gold and oil prices are higher in early trade as is the euro. The euro gained strength as a compromise over Greece looks like it may be reached. The yen is essentially unchanged versus the dollar.
The only item left on the calendar for the week is the 1:00pm 10-year TIPS auction. The rest of the day will be dominated by European news and bonds and mortgages following equities
Rates on the Rise?
The bond and mortgage markets opened better this morning after the strong selling the last two sessions taking rates up 20 basis points. The Greek debt issue is off the radar for the moment after its parliament voted to cut spending and qualify for assistance from the IMF and EU keeping Greece from defaulting, at least for now. Safety trades in US treasuries being closed and the very weak treasury auctions this week along with the end of QE 2 today—all combined to drive rates higher in a rapid move. Mix in that the ECB will likely increase its base interest rates next week and the tone has changed. Both the 10 yr note and FNMA 4.0 coupon hit and held their respective 200 day averages but broke all other shorter term averages, the momentum oscillators are now in bearish levels. As we continue to point, the bond and mortgage markets are going to remain volatile over the next week or so as investors work through the end of QE 2, Europe’s continuing debt issues and the weakening economic outlook. We are not looking for interest rates to increase in a major way but it is unlikely rates will return to the best levels seen three or four days ago.
Germany’s biggest banks and insurers and the government agreed on a draft proposal to roll over Greek debt holdings before a meeting with Finance Minister Wolfgang Schaeuble today, people familiar with the plan said.(Bloomberg)
Weekly jobless claims at 8:30 were down just 1K to 428K, estimates were for a decline of 8K. Continuing claims declined 12K to 3.72 mil. Weekly claims have now been above 400K for 12 consecutive weeks, no improvement but equally no increases in claims.
At 9:30 the DJIA opened +47, the 10 yr note +7/32 at 3.10% -2 bp and mortgage prices +5/32 (.15 bp).
At 9:45 the June Chicago purchasing mgrs index, expected at 53.8 frm 56.6 in May, jumped to 61.1; new orders increased to 61.2 frm 53.5, employment did decline to 58.7 frm 60.8 and prices pd at 70.5 frm 78.6 on a decline in oil prices recently. The report much stronger than thought flipped the bond and mortgage markets from minor price gains to lower prices; mortgage prices at 9:3 up 5/32 (.15 bp) at 9:50 -5/32 (.15 bp), a .30 bp swing lower and breaking the 200 day averages on the 10 yr yield and prices on the FNMA coupon. VOLATILITY!
Will the Fed launch QE 3 at some point? That is the question being debated in minds of traders now with the economic outlook declining somewhat. Many believe the Fed is out of bullets to help the economy, historically low US interest rates haven’t helped much, at least based on where the economy stands now; however what would have been the situation if the Fed hadn’t executed QE 2, buying $600B of US treasuries? Bernanke has said it is now a fiscal matter, meaning Congress and the Administration have the ball now; that of course isn’t a confidence builder in the minds of investors since Washington continues to play its political games while the country stumbles.
Today is the end of the month and the end of the quarter, to some extent today trading in equities and bonds may be impacted on moves large investors need to make to adjust their portfolios for the end of the 2nd quarter.
Tuesday Trivia
Treasuries and mortgages opened weaker this morning after a little pull-back yesterday after the weak $35B 2 yr note auction. With one exception (last Friday) the bellwether 10 yr note has traded within a 10 bp range (3.00% to 2.90%) for the last 10 days. Yesterday’s weak bid on the 2 yr note may imply that investors are becoming less interested in USA debt at the present low rates; this afternoon Treasury will auction $35B of 5 yr notes, a little better test of that theory.
Greece still dominates the news today; a two day strike in the country met with tear gas and rubber bullets today while the parliament is debating serious cuts in spending, much of it is on cutting social programs. The much anticipated vote on the necessary cuts to get help from the IMF and EU will take place tomorrow morning, the number of yes votes has to be more than 150 to get it done. Although there are strikes and riots markets are expecting the vote on cuts will pass. France led the way yesterday for its banks to re-cast loans to Greece, extending payouts as far out as 30 yrs on debt maturities less than 5 yrs. Germany is expected to force the same for its banks.
The Case/Shiller April 20 city home price index was down 0.1% frm March and yr/yr down 4.0%, both generally in line with expectations. Nothing new there, housing will continue to drag down the economic recovery.
The ECB raised its benchmark rate in April for the first time in almost three years, lifting it by a quarter point to 1.25 percent. Inflation in the 17-nation euro region has been in breach of the ECB’s 2 percent limit since December. According to comments frm Jean Claude Trichet this morning the ECB is likely increase rates again next week at its meeting.
The DJIA opened +30, the 10 yr at 9:30 -5/32 at 2.95% +2 bp and mortgage prices -3/32 (.09 bp).
The June consumer confidence from the Conference Board, expected at 10:00 was somehow released at 9:40. It was expected about unchanged from May at 60.7, as released down to 58.5. The present conditions index fell to 37.6 frm 39.3, the expectations index fell to 72.4 frm 76.6. No reaction to the softer data, the stock indexes continued to gain and treasuries and mortgages lost a fell clicks immediately after the early release.
Next up for the bond market, the $35B 5 yr note auction. Traders will be keen to see what kind of demand will emerge after the surprisingly weak demand for yesterday’s 2 yr note auction.
Although markets are expecting Greece will pass the austerity cuts demanded by the IMF and EU, there is still a little uncertainty. We don’t expect much in the markets this morning, and not much this afternoon unless the 5 yr flops. Today it is mostly waiting on Greece in the bond market. There is uncertainty on how markets will react if the vote is positive; will investors take off the safety trade, one factor keeping US rates low?
Monday Minutia and The Week To Come
This Week starts Monday with Treasury selling $35B of 2 yr notes , the first of three auctions this week totaling $99B and the last auctions before QE 2 ends on Thursday. Economic data Monday, personal income and spending. Later this week manufacturing reports, the ISM and Chicago purchasing mgrs index; recent data on manufacturing has been softening. The stock market continues to suffer under the increasing cloud of the economy back-sliding. As the week moves on trading will thin out going into a long week-end. Normally employment is out on the first Friday of each month, but not when the first Friday is ton the 1st of the month; that data comes on the 8th of July. Not a lot of data this week, the bond market will take its direction from how equity markets perform. Greek lawmakers start a three day meeting on Monday in an attempt to pass spending cuts ($111B) to meet demands from the IMF and EU for a bailout deal.
Treasuries and mortgages opened flat this morning with the stock indexes also about unchanged. At 8:30 May personal income and spending; income up 0.3% and spending unchanged. The core PCE up a little, +0.3%; May personal savings rate +5.0% up frm +4.9% in April. Consumers still saving, a good thing overall but further indication that consumer spending isn’t going to be the driver of any potential economic recovery. Historically personal spending accounted for 70% of GDP, now any improvement in the economy has to come from exports and in our view that is a huge hill to climb. The weak spending added a little support to the bond and mortgage markets and pushed stock indexes into the red.
This afternoon Treasury will auction $35B of 2 yr notes, the first of three auctions this week to borrow a total of $99B and the last of Treasury auctions before the end of QE 2 on Thursday. The question now is, with QE ending will interest rates remain at these low levels as the Fed exits? For the last six months the Fed has purchased the equivalent of about 60% of all Treasury borrowing in the period.
Greece begins three days of debate in its parliament to approve spending cuts of $111B to trigger the IMF and EU package approved last week and keep Greece from defaulting. Greek, Portuguese and Irish 10-year bonds declined, driving up the extra yield investors demand to hold the securities instead of benchmark German bunds. The debt crisis that is spread all over Europe’s second tier countries and is one key driver keeping US interest rates low and the US stock market sliding.
This Week’s Economic Calendar:
Monday;
8:30 May personal income and spending (as reported +0.3% on income , spending unchanged)
1:00 pm $35B 2 yr note auction
Tuesday;
9:00 am Case/Shiller Apr 20 city home prices (-3.9%)
10:00 am June consumer confidence index (60.7 frm 60.8)
1:00 pm $35B 5 yr note auction
Wednesday;
7:00 am weekly MBA mortgage applications
10:00 am NAR May pending home sales (+0.7%)
1:00 pm $29B 7 yr note auction
Thursday;
8:30 am weekly jobless claims (-8K to 421K; con’t claims 3.70 mil frm 3.697 mil)
9:45 am June Chicago purchasing mgrs index (53.8 frm 56.6)
Friday;
9:55 am U. of Michigan final June consumer sentiment index (71.8 unch)
10:00 am June ISM Nat’l manufacturing index (51.3 frm 53.5—under 50 is considered contraction)
3:00 pm June auto and truck sales
Crude oil continuing its decline this morning on increasing belief the US economy is going to slip more and in China its economy also slowing. The IEA and the Obama Administration released 60 mil barrels of oil from the strategic reserves last week (30 mil from the US reserves); the IEA saying it will release more if necessary. Meanwhile gasoline prices continue to fall. It is a moving target the amount of declines in given areas of the country; here in Indianapolis gas has fallen from $4.22/gal a few weeks ago to $3.30 yesterday. Will the decline increase consumer discretionary spending?
The DJIA opened +20 at 9:30, the 10 yr note +2/32 and mortgage prices at 9:30 unch.
Slowly interest rates continue to decline, likely more this week with no firm resolution on Greek debt plans until Thursday. Demonstrations will go on all week in Athens as politicians debate spending cuts that have citizens revolting and protesting. It is likely the government will meet the demands of the IMF and EU with spending cuts, but until the ink is dry on the legislation the uncertainty will be a continuing positive for US bond markets.