Rate snapshot: Consumer prices fall for first time since 2013, mortgage apps up

by MPA17 Sep 2014

A slightly better start this morning ahead of the FOMC this afternoon. August consumer prices were down for the first time since April 2013; the overall expected unchanged declined 0.2% while the core (ex food and energy) was unchanged against expectations of +0.1%. The core unchanged is the first time in almost 4 yrs there was no growth. As we have noted previously, inflation is not on the table even though with rates at these lows it gets attention from pundits and analysts. Yr/yr CPI up 1.7% frm +2.0% in July; the core yr/yr also +1.7%. No worries about inflation; the Fed’s fave is the personal consumption expenditures index linked to consumer spending; it is up 1.6% yr/yr an well below 2.0% the Fed wants; PCE has not been at 2.0% since April 2012. PCE data is reported each month with personal income and spending data; the Sept report hits on the 29th.
Q2 current account deficit declined to -$98.5B, down substantially more than expected ($113.0B). The broadest measure of international trade because it includes income payments and government transfers, narrowed 3.5%.
Some increased stress in Ukraine on the cease fire, separatists not happy. In Kiev there was an agreement for special status of the eastern region where separatists are holding court. Government forces were shelled by Russian and rebel troops at 15 locations during the past 24 hours. Lawmakers approved a bill expanding the powers of the Donetsk and Luhansk regions, but not enough to satisfy separatists that want total autonomy. Not much impact on the markets, but we have to keep an eye on what is happening there. Russian President Vladimir Putin wants to turn Luhansk and Donetsk into quasi-statelets with the right to veto major national initiatives, such as Ukraine joining NATO.
Better mortgage apps last week according to MBA. Applications increased 7.9% last week after declining 7.2% the week before. The purchase index up 0.5% while re-finance index up 10%. Yr/yr the purchase index down 10%. The refinance share of mortgage activity increased to 57% of total applications, the highest level since February 2014, from 55% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 7.6% of total applications. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.36%, the highest level since June 2014, from 4.27%, with points decreasing to 0.20 from 0.25 (including the origination fee) for 80% loans.
At 9:30 the DJIA opened -3, NASDAQ +4, S&P +2; 10 yr 2.57% -2 bp and 30 yr MBS price +6 bp frm yesterday’s close and -8 bps frm 9:30 yesterday.
At 10:00 the Sept NAHB housing market index was expected to have increased frm 55 to 56; as reported the index jumped to 59. A solid report but still the NAHB worries about the lack of 1st time buyers that are not able to buy; low incomes, huge debts frm college and young people are not marrying and forming households.
No ground troops in Iraq? The President is on record that no boots will be on the sand in Iraq, but the Chair of the Joint chiefs told politicians they may be necessary. One more confused and uncertain foray into geo-politics that will keep markets continuing to try handicapping how it will play out over time. The Islamic State has gained so much momentum that it may be hard to turn back and Arab countries are still holding back on how to help, or if they will. We noted two months ago that the region is beginning to boil and could well boil over to an all-out mid-east conflict.
Nothing now until 2:00 this afternoon and markets are likely to sit still until then. The FOMC policy statement, the FOMC quarterly forecasts also out. Most headline interest is on how the FOMC will frame the statement on the outlook for when the Fed will begin to increase rates. Until yesterday most analysts were lined up with the idea the statement would change to remove “rates will stay low for an extended period” to one more specific. Yesterday as the clock ticked down those lemmings began breaking ranks with some now believing the statement will not be altered. Not anything different, each FOMC meeting generates weeks of comments and opinions. Our man focus isn’t so much about the statement but the quarterly outlook data that will accompany the statement. Rising geopolitical uncertainty stemming from America’s renewed involvement in Iraq as well as the conflict between Russia and Ukraine could restrain some of the FOMC optimism for the outlook.
The bond and mortgage markets continue their bearish patterns; the 10 is above its 100 day and lesser moving averages and other models are bearish currently. Wish we could fade it because we are not expecting interest rates will increase and may well decline as global economies soften. The US economy doing OK but without growth in Europe and China the recent growth is not likely to continue.
PRICES @ 10:10 AM
10 yr note: +5/32 (15 bp) 2.58% -1 bp
5 yr note: +1/32 (3 bp) 1.77% unch
2 Yr note: unch 0.54% unch
30 yr bond: +9/32 (28 bp) 3.35% -1 bp
Libor Rates: 1 mo 0.153%; 3 mo 0.234%; 6 mo 0.330%; 1 yr 0.582%
30 yr FNMA 3.5 Oct: @9:30 101.64 +6 bp (-8 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Oct: @9:30 102.92 +5 bp (-1 p frm 9:30 yesterday)
30 yr GNMA 3.5 Oct: @9:30 102.87 unch (-16 bp frm 9:30 yesterday)
Dollar/Yen: 107.29 +0.16 yen
Dollar/Euro: $1.2964 +$0.0004
Gold: $1237.70 $1.00
Crude Oil: $94.65 -$0.23
DJIA: 17,162.94 +30.97
NASDAQ: 4563.27 +10.51
S&P 500: 2003.93 +3.95



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