Interest rates were weaker early this morning, prior to 8:30 the 10 yr climbed to 2.50% on news that tensions relaxed a little in Ukraine as the bodies of the passengers were sent to government controlled city of Kharkiv, finishing the first part of a journey out of the conflict zone where they have been stuck for days. The Black Boxes were also returned by the separatists. The separatists also declared a cease fire around the crash site and will allow Dutch security officials to accompany crash investigators to the site; but not Ukrainian officials.
At 8:30 June CPI was reported up 0.3% overall and +0.1% excluding food and energy. Markets were expecting the core to be up 0.2%, that it was less provided support for the 10 and MBS prices. Yr/yr the overall +2.1% slightly above 2.0% the Fed wants, yr/yr core was up 1.9%. The increase in the overall was primarily due to high gasoline prices in June but since then the price of gas has declined; retail gasoline in the U.S. slid to the lowest level in almost four months as refineries boosted production. Traders took the inflation report as a minor plus and turned the 10 back to unchanged and MBS prices increased somewhat. In May CPI was up 0.4% with the core +0.3%. The relaxed inflation data supports Yellen’s comments that May data was temporary. If prices remain in check, Fed policy makers can keep interest rates low well into 2015. There just is no pricing power now, and it isn’t likely to be a problem as the US and global economies are still on a very slow growth path. On the report the 10 yield improved from 2.50% earlier to 2.47% -1 bp, 3 yr MBS prices at 9:15 were +7 bps from yesterday’s close.
The FHFA May housing market index was expected to have increased 0.3%, as reported +0.4%; April was revised from 0.0% to +0.1%. Yr/yr the index is up 5.5% from +6.1% in April. The decline on the yr/yr basis is more evidence that the housing sector may be slowing. Earlier this yr the yr/yr had been up 7.0%. More anecdotal evidence that inflation in home prices is weak.
At 9:30 the DJIA opened +37, NASDAQ +21, S&P +7; 10 yr 2.47% -1 bp, 30 yr MBS price +3 bps from yesterday’s close.
At 10:00, June existing home sales were thought to be +2.0% at 4.99 mil (annualized). As reported sales increased 2.6% to 5.04 mil units (annual), the first time annual sales have been over 5.00 mil in months. Yr/yr sales down 2.3%. Based on the sales pace there is a 5.5 month supply. The median sales price $223,300.00, +4.3% yr/yr, the lowest increase since Mach 2012. Overall still slow but this report was better than forecasts, but not much. The initial market reaction improved the stock indexes; the 10 yr yield edged up to 2.49% +1 bp from yesterday’s close.
All technical indicators remain bullish, however as noted previously, the 10 is finding strong resistance at 2.44%, the low at the end of May prior to the May employment report that was stronger than forecasts. Our work will not turn bearish until the 10 closes above 2.57%, that would allow MBS prices to decline about 70 basis points before MBSs will turn bearish. Too much risk to take the wider perspective. Ukraine/Russia is still a factor and likely the situation will continue to be for months. Somewhat interesting that the US and Europe have not announced new sanctions on Russia yet. Europe is dragging feet as increased sanctions that would be strong enough will hurt its economy and US economic outlook would ratchet lower.