Posts Tagged → Technical Trading
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.
Happy Cinco De Mayo!
Treasuries and mortgage markets better again this morning with the stock market weaker. Crude oil, gold, silver and other commodities lower as the commodity bubble continues to burst. At 8:30 more bad news for the economy, weekly jobless claims were expected to have declined 29K they increased 43K to 474K, the biggest increase since Aug 2010. Continuing claims increased to 3.733 mil frm 3.659 mil. The 4 wk average now at 431,250; 400K is considered pivotal by many analysts, not sure why other than its an easy rounded number. A huge shock to markets with many still professing economic improvement; that view has been shaken badly in the past week and is turning markets around quickly. Although the headline hit hard there were some seasonal factors that may have exaggerated the increase; a spring break holiday in New York, a new emergency benefits program in Oregon and auto shutdowns caused by the disaster in Japan were the main reasons for the surge.
Q1 preliminary productivity increased 1.6% a little better than expected (+1.0%) but weaker than Q4 2010 at 2.6%. Q1 unit labor costs were up 1.0% a tad higher than thought (+0.8%), costs in Q4 were down 0.6%.
Crude oil last Friday traded at $114.00, this morning $106.00; gold last Friday $1560.00, now $1504.00, silver, copper and other commodities all reversing after months of increased prices. Markets seem to go from one bubble to the next, the commodity bubble being the latest and now bursting.
The Bank of England kept its benchmark interest rate at a record low (0.5%) as signs the recovery is losing momentum kept a majority of policy makers focused on stimulating growth during the government’s fiscal squeeze.
Jean-Claude Trichet, ECB chief left interest rates unchanged after recent increases to fight off inflation. He said the bank will monitor upside inflation risks “very closely,” suggesting it may wait until after June to raise interest rates again. “It is essential that recent price developments do not give rise to broad-based inflationary pressures,” Trichet commented after leaving rates unchanged at 1.25%. Central banks in the Philippines and Malaysia today raised interest rates, and India this week increased its borrowing costs for the ninth time since March 2010. Rates in China, may rise further after its central bank said yesterday that taming inflation is its top priority.
The bond and mortgage markets are better this morning but have already slipped back from their best levels at 9:00 after the data at 8:30. The 10 hit 3.17% at 9:00, at 9:30 3.19%; mortgage prices at 9:00 +8/32 (.25 bp), at 9:30 +4/32 (.12 bp). The technical’s are in overbought levels on the momentum oscillators and relative strength index, the potential of some consolidation exists now. At 9:30 the DJIA opened -51, as long as the indexes are weaker the bond and mortgage markets should hold gains; any recovery in equities with bond mkt overbought will likely pressure prices in mortgages. The wider perspective remains positive, however at present low yields we wonder how much lower rates can fall.
Nothing left today in terms of scheduled news; the rest of the day will be guided by the equity market trading. Tomorrow the April employment report which now is expected to show less job growth than was expected earlier this week after the ADP report yesterday and the increase in weekly claims last week and this week although today’s claims are not part of the data gathered for tomorrow’s report.
Tuesday Trivia
US rate markets slightly better this morning but not much; the early trade in stock indexes were pointing to a better open on UBS earnings. The Fed begins its FOMC meeting today concluding tomorrow with the short policy statement at 12:30 then Bernanke’s awaited press conference at 2:15.
At 9:00 the Case/Shiller Feb home price index; on the 20 city measurement prices fell 3.3% yr/yr and on the 10 city metro prices fell 2.6% yr/yr. No reaction to the data as usual, there isn’t any improvement in the housing markets with prices continuing to fall and consumers seeing little compelling reason to buy or sell. Housing was the prime driver for the US economy since WW II until four years ago, now there seems to be little interest from Washington to directly address the issue.
At 9:30 the DJIA opened +16, the 10 yr note +4/32 and mortgage prices at 9:30 +.12 bp.
At 10:00 April consumer confidence from the Conference Board, expected at 64.4 frm 63.4 in March, was better at 65.4 frm March revision up to 63.8 frm 63.4. The present situation measurement at 39.6 frm 37.5 the highest since Nov 2008; 12 month expectations 82.6 frm 81.3 and the 1 yr inflation outlook index to 6.3 frm 6.7. Overall a better consumer outlook boosted equity indexes a little but the bond market had little initial reaction.
The only significant focus point now is on tomorrow’s FOMC statement and what Bernanke will say at his press conference in answering what we hope will be the tough questions. The general conclusion now is that the Fed will complete its QE 2 $600B treasury purchases by the end of June. What comes next is what markets are seeking; most bond market participants and stock market enthusiasts are expecting Bernanke will keep interest rates low for at least the rest of the year and possibly longer. Bernanke and some other Fed officials have repeatedly defined the economy as in “modest recovery” and still fragile. As long as the Fed (Bernanke) see it that way the Fed will do whatever is necessary to keep rates low. As long as that outlook holds stock markets will continue to improve, low rates don’t have much positive impact on consumers (maybe lower car loans), mortgage rates are low but that isn’t motivating anyone. All about driving the dollar lower and pushing investments into equity markets.
Thursday the first look at Q1 GDP is expected at 1.5% to 2.3% growth; a lot weaker than was thought just six weeks ago. Increasing numbers of analysts are currently lowering growth expectations for Q2. The Fed isn’t about to yank its support with the economic outlook not as rosy as most were expecting a short time ago. Two weeks ago markets were all a buzz fearing inflation as commodity prices increase, today focus has changed to how much more help the Fed will provide. Unlikely we will have another QE 3 but the Fed has other ways to pump money into the bond markets; it may decide to reinvest the interest and principal payments from its bond holdings in treasuries.
The bond market isn’t expecting US rates will increase when the Fed ends QE 2 at the end of June. Since last Nov the Fed has purchased about $550B of treasuries while Treasury has issued $825B of notes and bonds, when the Fed ends its QE as is generally expected traders apparently believe markets will step up and fill the short-fall.
Treasury auction $35B of 2 yr notes at 1:00 this afternoon, expectations are for good bidding.
Technically the bond and mortgage markets remain bullish; that said we will continue to stand down from buying treasuries at least until we hear from Bernanke tomorrow
Monday Mania!
This Week; is Holy Week. Trade likely will be quiet with the religious holiday. Most all of the data points this week are centered on the housing sector; starts and permits for Mar, new and existing home sales, the NAHB housing market index Monday and the FHFA housing price index on Thursday. The only other releases are weekly claims on Thursday and the and the April Philadelphia Fed business index also on Friday. That’s it for the week. Markets closed on Friday.
Until a week ago the overwhelming consensus in the markets was that the US economy would have a strong Q1 and optimism for the rest of the year was being touted as continued improvement. Over the past week investors were beginning to re-think the economic outlook and lowering expectations. It started with the IMF saying it is revising lower GDP Q1 growth from 2.0% to 1.5%; markets had accepted growth in Q1 at +3.0%. The Fed’s Beige Book out last week, while remaining optimistic, showed indications that growth isn’t as powerful as markets were thinking. The National Federation of Independent Business overall index fell in April, taking the optimism that had improved since last Oct totally away. Small businesses account for the majority of jobs. This is also earnings season with companies reporting Q1; so far earnings have been a little disappointing.
Consumer spending declining, until recently, have been ignored by investors. Even with gasoline and food prices increasing markets generally didn’t pay much attention—-until last week. $4.00+ gasoline and rapidly increasing food prices will, as we have continued to mention, slow consumer spending. Bernanke out there saying the increase in energy and commodity prices are “transitory” may not be; markets beginning to understand that. With consumer spending less than expected and the housing markets still showing no signs of stabilizing, let alone improving, investors are getting a little nervous.
And as of this AM:
Treasuries and mortgage markets opened better this morning on weaker stock indexes pointing to a weak open at 9:30. Trading this week will be on low volume with Passover and Holy Week. Already this morning there has been an increase in volatility; the 10 yr note traded +10/32 at 9:00 then fell to -5/32 and immediately bounced back to unchanged; mortgage prices at 8:59 this morning +5/32, at 9:07 -1/32, at 9:15 -4/32 (.12 bp). This week will likely be somewhat volatile but by the end of the week not much changed; many investors and traders will be leaving by mid-week.
S&P roiled markets early this morning; saying it has downgraded US debt to negative. The DJIA opened -170 points at 9:30, the bond and mortgage markets were quite volatile as investors were somewhat shocked on the announcement. Treasuries erased an earlier advance, the dollar pared gains versus the euro and gold rallied. S&P affirmed reduced the long-term U.S. debt rating to negative from stable, while affirming its AAA long-term and A-1+ short-term sovereign credit ratings. S&P said that more than two years after the beginning of the recent crisis, U.S. policymakers have not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures. While a shock, it shouldn’t have been with our politicians in Washington twinking around with budget cuts that were nothing; they patted themselves on their collective backs and announced a $38B cut in spending, but the actual real cut amounted to just $318 mil. All of the cuts were just not funding what had been approved previously. As long as our “leaders” are unwilling to make serious steps to cut spending and increase revenues (taxes) the US debt rating will continue to be down-graded, and US interest rates will increase.
Listening and watching the reaction from guests on CNBC one would think markets were slapped in the face with the down-grade and are taking offense. We and others have warned for over two years that US debt ratings were going to be lowered. Somehow most in the US believe the US is immune to debt ratings declines; time to wake up folks, the US if corporate accounting were to be applied, is bankrupt. 50% of all Americans pay no federal income tax while politicians don’t have the stones to do what everyone knows has to be done. We do not have leaders, we have politicians that above all want to keep their jobs.
This week has little data except for the housing sector; March starts and permits, March existing home sales as well as this morning’s NAHB housing market index and Thursday’s FHFA housing price index. The only non-housing data comes on Thursday with weekly jobless claims and the April Philadelphia Fed business index. The markets will close early on Thursday and be closed Friday for Good Friday.
This Week’s Economic Calendar:
Today;
10:00 am April NAHB housing market index (17 was expected, as reported 16)
Tuesday;
8:30 am March housing starts and permits (starts +7.8%; permits +3.9%)
Wednesday;
7:00 am MBA weekly mortgage applications
10:00 am March existing home sales (+2.5%)
Thursday;
8:30 am weekly jobless claims (-22K back to 390K; con’t claims 3.650 mil frm 3.680 mil)
10:00 am April Philadelphia Fed business index (32.9 frm 43.4 in March)
Mar leading economic indicators (+0.2%)
FHFA Feb housing price index (N/A)
Friday;
Markets closed
Fed speak; at 12:30 Dallas Fed’s Fisher speaking on the economic outlook. Likely he will continue the Fed’s outlook, moderate growth with no inflation concerns but that the Fed will continue to monitor events closely. The Fed will complete the $600B QE 2 by the end of June. His comments won’t likely present anything new.
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.
Monday Minutia – 11/29
Well if you are reading this then you survived Thanksgiving and the following day known affectionately as “Black Friday”! Someone will need to eductae me as to the merits of eating, drinking, and being meery at Thanksgiving and then carting your ass down to the local shopping center to stand in line and get into your favotie store at midnight for some bargains?!? I heard a number of stories in regards to experiences and it is a wonder that there are not stories of riots due to some of the shopping tactics employed by the veteran Black Friday shoppers!
After hitting the lows of the year on rates about 3 weeks ago, the Federal Reserve launched the vaunted QE II (Quantitative Easing II) and the world and domestic markets met the launch with anthing but enthusiasm! Rates spiked dramatically up (.375% to .625% in rate) and have since seemed to stabilize but have not as yet begun any substantive settling down. What is influencing the market right now?
- High unemployment and the weak housing market continues to hold back economic growth.
- Uncertainty on the housing market brought on by the foreclosure mess and the “robo signing” scandal continues to hold down any chance at a housing recovery.
- Unemployment is still high at 9.6%. When factoring in discouraged workers and those that have “settled” for part time work we are looking at a number more like 17.1% nationwide!
- Inflation is not a factor at a 1.1% year over year rate.
- QE II is designed to create inflation so those of us that are operating on less income can pay more for the ggods and services we need to survive!?!? (you figure that one out)
On the economic calendar for this week is:
- 9:00 am Case/Shiller 20 city home price index (+1.0%)
- 9:45 am Chicago purchasing mgrs index (59.8 frm 60.6 in Oct)
- 7:00 am Weekly MBA mortgage applications
- 8:15 am ADP employment data (+58K new private job growth)
- 8:30 am Q3 productivity (+2.4% frm +1.9%)
- Q3 unit labor costs (-0.4% frm -0.1%)
- 10:00 am Nov ISM manufacturing index (56.4 frm 56.9 in Oct)
- 2:00 pm Nov auto and truck sales (autos 3.71 mil, trucks 5.35 mil)
- Fed’s Beige Book (detailed report on the economy)
- 8:30 am weekly jobless claims (+16K to 423K: con’t claims 4.20 mil frm 4.182 mil)
- 10:00 am Oct pending home sales (unch frm Sept)
- 8:30 am Nov employment data (non-farm jobs +130K, non-farm private sector jobs +140K; unemployment unchanged at 9.6%)
- 10:00 am ISM Services sector index (Nov 55.0 frm 54.3 in Oct)
- Oct factory orders (-0.8%)
Expect more volatility on the rate markets as we work through the reports and the holiday season. Thanks and have a great day!
The Week Ahead
For the third straight week, mortgage markets showed little conviction in the face of contrasting data. Mortgage bonds ended the week slightly better, but mortgage rates did not.
Conforming mortgage rates were up-and-down all week before ending the week with a slight worsening. The inter-day volatility has come to characterize the current mortgage market.
In part, rates are jumpy because of data; it’s unclear when the economy is expanding or contraction — despite the “official call” of the recession’s end in June 2009.
Consider the conflicting reports from last week. Separate Consumer Confidence reports showed sentiment falling in September, but on the other hand:
- Initial jobless claims dropped 3%
- Household income is shown to be rising
- GDP is improving year-over-year
In other words, the economy is in recovery, but the average citizen isn’t believing it. That causes purse-strings to stay tight, thereby retarding economic growth.
Wall Street is struggling with the contrast, and constantly changing its outlook. It’s making mortgage rates tough to pin down and this week should reflect that. In addition to a home sales report and new consumer confidence data, the government prints its market-moving Non-Farm Payrolls report.
More commonly called “the jobs report”, Non-Farm Payrolls details the workforce, its size, and its Unemployment Rate. There’s expected to be little change from August, a month considered “fair” by recent employment standards. If the jobs report shows improvement and/or strength, look for mortgage rates to rise. If the report does deterioration and/or weakness, look for mortgage rates to fall.
The Non-Farm Payrolls will be released Friday at 8:30 AM ET.