Rate snapshot: Fed expected to continue taper; Iraq heats up

by MPA16 Jun 2014

Interest rate markets started a little better this morning
after trading unchanged last week; the early trade in stock indexes this morning pointed to a slightly lower opening. This week is a huge one for the financial markets with a number of key economic reports but the elephant…. the FOMC meeting that begins tomorrow and concludes on Wednesday at 2:00 with the policy statement. Overwhelming consensus is for another cut of $10B from the Fed’s monthly purchases of MBSs and treasuries and continuing the 0.25% FF rate. This meeting has added interest on how the Fed sees the economic outlook after the World Bank and IMF have lowered their outlook for us growth (IMF out this morning lowering 2014 growth from +2.8% to 2.0%). Immediately after the policy statement the Fed will release its quarterly report on inflation, growth and longer view outlook; the Fed issues the report four times a year; March, June. Sept and Dec. Then at 2:30 Janet Yellen will hold her press conference. Between now and Wednesday afternoon we don’t expect much overall change in the bond or stock market.
The Iraq situation escalated over the weekend with photos of what Sunnis say are pictures of them assassinating Shiite militia; the pictures on every TV station and newspapers this morning. Meanwhile the US is moving some diplomats out of Baghdad to other consulates away from the danger and is beginning talks with Iran about the situation. Iran is a Shiite country and is saying that it will enter the fighting against the Sunnis if they get too close to its border.
At 9:30 the DJIA opened -46, NASDAQ -7, S&P -4; 10 yr note 2.60% unchanged. 30 yr MBS price at 9:30 +5 bp from Friday’s close and 32 bps better than at 9:30 Friday morning.
Earlier this morning at 8:30 the June NY Empire State manufacturing index was better than expected at 19.28 with forecast of 15.0 and better than May’s 19.0 read; the index is the highest in 4 yrs. At 9:15 May industrial production was expected at+0.5% as reported +0.6%, April production was revised from -0.6% to -0.3%, another good report. May capacity utilization, also at 9:15 was better than forecasts at 79.1% compared to 78.9% expected and 78.6% in April. At 10:00, another good report; the June NAHB housing market index was thought to be at 47 from 45 in May, as reported the index jumped to 49 but builders said they still faced headwinds; Like the ISM reports, any reading under 50 is considered contraction).
This Week’s Calendar:
          8:30 June NY Empire Stat index as reported 19.28
          9:15 May industrial production as reported +0.6%; May capacity utilization as reported 79.1%
          10:00 am NAHB June housing market index as reported
          8:30 am May housing start (-3.4% at 1.036 mil)
                       May building permits (-2.7% at 1.062 mil)
                       May CPI (overall and core both +0.2%)
          7:00 am weekly MBA mortgage applications
          8:30 Q1 current account balance (-$99.8B)
          2:00 pm FOMC Policy statement
          2:30 pm Janet Yellen press conference
          8:30 weekly jobless claims (-4K to 313K)
          10:00 am June Philly Fed business index (13.0 from 15.4 in May)
                         May leading economic indicators (+0.6%)
With the FOMC meeting and the Fed’s GDP forecast on Wednesday we don’t look for much overall change between now and then. Iraq will continue to trouble investors as it is likely the situation will get more tenuous before it might calm down. The US is considering use of military force but no troops on the ground according to the President. Obama has ordered an aircraft carrier into the gulf for likely air support of the Shiites. If you sit back and review the various situations in the mid-east and Eastern Europe it isn’t a nice picture; Syria, Israel, Ukraine, Iraq and to a lesser extent Thailand, China and Vietnam---all in various troubling situations; the world is presently facing a lot of global issues that do in one way or the other have a direct impact on investor thinking.



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