By David Shirmeyer, CEO at Sigma Research
The key stock indexes dropped yesterday, the bond and mortgage markets improved.
MBS prices however are unchanged this afternoon frm when first pricing occurred this morning. We noted that may be the case when the rate markets opened so strong early. Volatility continues in both equity and interest rate markets.
The only report of consequence Tuesday, January wholesale inventories; inventories
expected to have declined 0.1% increased 0.3% and final sales declined 3.1%. Dec sales were revised lower, frm -0.35 to -0.9%. Inventory builds with declining sales is a drag on GDP, in this case its Q1 although we still are not done with it and haven’t yet gotten the final Q4 GDP (coming March 27th).
Treasury auctioned $24B of 3 yr notes Tuesday afternoon
. The rate hit at 1.104%, the cover 3.33, indirect bidders 51.4%, directs 8.0%. The auction was met with solid demand, although the indirect bid was a little light for a 3-year auction. The bid-to-cover was in line with the norm. Treasuries rallied after the announcement. Last month’s 3 yr at 1.05%, cover 3.34, indirects 48.9% and directs 7.2%. The last 12 auction averages; 0.964%, cover 3.29, indirects 63.1%, directs 9.5%.
Today's $21B of 10-year note auction will be more impacting
as it’s the note that sets the direction of long dated rates including MBS prices. Also tomorrow the weekly MBA mortgage applications and the Jan Treasury budget.Until Thursday there isn’t a lot of key data points this week.
The continual increase in the U.S. dollar is getting some focus frm stock investors concerned that the dollar’s strength will hurt forward profits
. The dollar will go to parity against the euro currency, currently at $1.0695, eight months ago the dollar traded in the $1.46 range.
Interest rates in Europe dropped Tuesday, moving our treasuries to follow
. The near term outlook remains at best questionable, our technicals remain bearish. If though the recent decline in stock indexes continues rates will drop back further. We continue our wider forecast that US interest rates are not likely to increase as much as most analysts and economists expect.
How high is out of my wheel house to forecast, it depends more on global markets
and what the Fed is going to do. Presently, the general consensus is the Fed will start tightening in June; we are not in that camp, especially if equity markets actually enter a large correction. Can’t see how the Fed can increase rates when the US stock market is declining, but June is a long way off. As of Monday the DJIA and S&P have given back all of the gains this year, as of this afternoon now at a loss.
More support for the rate markets; crude oil declined today now well below the $50.00 price that traders see as pivotal
. Another decline frm current oil prices and the selling is very likely to resume taking the price down in another leg lower. If that happens stocks are going to fall further and we will have another opportunity at lower mortgage rates. It is absolutely key now to prepare for the possibility of rate declines, preparing potential buyers and re-financers to be alert.
Not likely rates will decline to the recent lows in early February, and those that believe they can pick the bottom are usually left in the dust. Remind clients that market volatility is going to remain high in coming weeks. One week frm today the FOMC meeting, the Fed will also release quarterly forecasts and Yellen will conduct her press conference next Wednesday at the conclusion of the meeting.