Rate Snapshot: Home price gains smallest in almost two years

by MPA28 Oct 2014

By David Shirmeyer, CEO at Sigma Research

Prior to 8:30 treasuries were slightly weaker with U.S. stock indexes on another roll, the Dow Jones Industrial Average (DJIA) at 7:30 +80. September durable goods orders released at 8:30 were well weaker than +0.8% expected, as reported -1.3% after August orders dropped 18.2%. Excluding the transportation orders down 0.2% against forecast of +0.5%, ex defense orders down 1.5%.

Durables are a volatile series but today’s numbers linked with the huge decline in August should be taken more seriously. However, the initial reaction in the markets wasn’t much, the DJIA indicating an open of 60 points and the 10-year note yield which was at 2.29% prior to the report slipped back to 2.27%, MBS price at 8:40 +2 bps. Waning demand for machinery and computers that signals companies are reluctant to invest in updating equipment.

Markets in Europe and emerging nations slow, fewer exports will probably also damp orders in coming months, indicating American manufacturing will cool. The initial reaction to the very soft report was about the usual these days, any less than expected measurement on the economy is pushed off with optimistic reasoning that excuses bad or weak data.
From China; increasing speculation that the Chinese central bank is considering lowering rates to inject liquidity in the slowing economy. The speculation raised stock prices across the emerging market complex. The MSCI Emerging Markets Index climbed 1.1%. In Ukraine movement to form a coalition with more ties to European countries while Russia is said to be sending another caravan to the eastern Ukraine region that is dominated by Russian separatists. Markets not concerned about it.

The August Case/Shiller 20 City Home Price index was slightly weaker than expectations, the estimates were an increase of 5.8% year-over-year, as reported +5.6%. The increase was the smallest since November 2012 and is another indication that lending standards need to be loosened.

On a national basis prices rose 5.1% year-to-year after a 5.6% gain in July. The less investor buying has slowed price gains while Dodd/Frank legislation six years ago continues to eliminate first time buyers. Prices in the 20-city index adjusted for seasonal variations decreased 0.1% in August from July.

Moving on through the session; at 9:30 the DJIA opened +72, NASDAQ +21, S&P +8; the 10 at 2.28% +2 bps and 30 year MBS price -3 bps from yesterday’s close and +1 bp from 9:30 yesterday. Lenders should have priced about unchanged this morning.

The last of the data today; the October consumer confidence index was expected at 86.8 from 86.0 in September. The confidence jumped to the best level since 2007 to 94.5. A huge change from Sept that is another hurdle for the interest rate markets. There has been no momentary reaction in the equity markets to the 10:00 report so far, not so in the MBS price that at 10:05 is -14 bp on the day and -11 bps from 9:30 a.m.

This afternoon at the Treasury will begin this week’s auctions with $35B of two-year notes.

U.S. stocks doing better this morning on better emerging markets over night. Almost 80% S&P 500 companies that have reported so far have beaten earnings estimates, while 61% have surpassed revenue projections, according to data compiled by Bloomberg. Profit for S&P 500 companies rose 6.3% in the third quarter and sales increased 4.1%, analysts predicted. 

The weak durables orders this morning has been swept away by traders. Better news from emerging markets where global weakness is a headline appears to be trumping the soft data this morning and ahead of tomorrow’s FOMC meeting. Lots of talk about whether or not the Fed will end the quantitative easing (QE); some say no, others yes---we say yes.

There is no reason now for the Fed to continue it, $15B a month is not much and would have little to no impact on markets. Keeping it alive could be interpreted as the Fed more concerned about the economic outlook. There is no thinking that the Fed has any thoughts now about increasing the FF rate.

The 10-year still is holding its support at 2.30% but it isn’t gaining any ground. Two weeks ago tomorrow the capitulation of all shorts happened but in the ensuing sessions there has been no follow-through. Becoming a little more concerning that the bond market hasn’t found buyers, but also no sellers of consequence either.

10 year note:                     -9/32 (28 bp) 2.30% +4 bp
5-year note:                       -4/32 (12 bp) 1.51% +3 bp
2-year note:                       unch 0.39% unch
30-year bond:                    -20/32 (63 bp) 3.07% +3 bp
Libor Rates:                  1-month 0.152%; 3-month 0.233%; 6-month 0.322%; 1 year 0.542%
30-year FNMA 3.5 Nov:   @9:30 103.58 -3 bp (+1 bp from 9:30 yesterday)
15-year FNMA 3.0 Nov:   @9:30 103.95 -1 bp (+7 bp from 9:30 yesterday)
30-year GNMA 3.5 Nov:   @9:30 104.63 -3 bp (+7 bp from 9:30 yesterday)
Dollar/Yen:                  107.92 +0.10 yen
Dollar/Euro:                $1.2751 +$0.0053
Gold:                           $1234.00 +$4.70
Crude Oil:                   $81.19 +$0.19
DJIA:                           16,870.79 +52.85
NASDAQ:                    4526.27 +40.34
S&P 500:                     1971.24 +9.61



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