Slightly weaker bond and mortgage markets this morning on a mixed bag of data at 8:30. August housing starts and permits were a clear message that the sector is still struggling. Starts were expected to have declined 5.0% to 1038K, as reported starts crumbled -14.4% to 956K units. August building permits were expected to be up 0.3% to 1054K units, as reported permits dropped 5.6% to 998K. The housing sector is weak, but the data continues to confuse as some of the reports are good while most are soft. Yesterday the Sept NAHB housing market index was better than forecasts, the index increased frm 55 to 59 with most forecasts for the index at 56. Today with starts and permits; where the rubber meets the road instead of opinions, clearly shows the sector is not providing any impetus to the economic recovery. Slow wage growth and tight lending standards continue to challenge the homebuilding industry by placing homeownership out of reach for some Americans. While the headline was soft, decline in single family starts were down just 2.4%, somewhat mitigating the headline that mostly shows multi-family declines.
On the other side of the issue on growth; weekly jobless claims were expected down 10K, as reported claims fell 36K to 280K the lowest in two months and pushing under 300K that has been the level for most of the last six weeks. In July claims fell to 279K then edged back to the 300K area the last month. The four-week average of initial claims, a less-volatile measure than the weekly figure, decreased to 299,500 from 304,250 the week before. The number of people continuing to receive jobless benefits dropped by 63,000 to 2.43 million in the week ended Sept. 6, the lowest since May 2007.
Yesterday the FOMC once again confounded most forecasters that were ‘sure’ that the Committee would change the language in the policy statement to reflect the Fed would be more specific about when it will begin increasing rates. The FOMC left the language the way it has been, that low rates will stay for an extended period. The Fed continues to fret that the employment sector is still soft with many of new jobs low paying and many part time. In the meantime markets have shown little concern that job creation is less than any other recovery in the last 50 years. Continued low interest rates negate a lot of reality; there isn’t many place to invest for the wealthy so stocks continue to climb.
The DJIA opened +40, NASDAQ +15, S&P +5; 10 yr note 2.63% +1 bp and 30 yr MBS price -6 bp frm yesterday’s close and -22 bp frm 9:30 yesterday.
At 10:00 the Sept Philadelphia Fed business index, expected lower at 23.5 frm 28.0 in August, as reported the index fell to 22.5 but the components were a little better. The employment component increased to 22.2 frm 9.1 in August and new orders to 15.7 frm 14.7. Judge it a mixed and another confounding report, hard to take the increase in the employment component.
Treasury rates and mortgage rates continue to increase even with the Fed ‘assuring’ interest rates will stay low for that extended period of time. No reason now to buy treasuries, the stock market is moving up making new highs on a regular basis and there isn’t any safety needs for investors to park money in sovereign debt (US treasuries). In Ukraine the government in Kiev appears to be weakening against Russian separatists. A Ukrainian law granting self-governance powers to separatist-held areas, while facing a lot of opposition within the Kiev politicians, nevertheless is a victory for Russia. One of Putin’s key plans has been to keep Ukraine frm joining NATO and it now appears he has accomplished that---for the moment. In the mid-east the pot is boiling but it hasn’t boiled over yet to a level that threatens global economies.
Day by day the 10 yr note continues to take out each support as rates move higher. The next level at 2.66% is the last near term support; a break above it will project a run to 2.80%. We don’t expect rates will increase that much when looking at underlying fundamentals but as you know we never fade market action and now everything is pointing to higher rates. Respect the Pizza and don’t assess the market in any other way than bearish. Get the deals done, there is not much likelihood now that rates will decline much. What I can say on a little positive near term view, the bond market is oversold. All near term momentum oscillators are at oversold levels. Doesn’t mean a strong rally is close, it suggests rates may stabilize. It is a day to day thing now in terms of holding/floating.
PRICES @ 10:10 AM
10 yr note: -3/32 (9 bp) 2.63% +1 bp
5 yr note: -4/32 (12 bp) 1.86% +4 bp
2 Yr note: -1/32 (3 bp) 0.58% +1 bp
30 yr bond: +2/32 (6 bp) 3.37% unch
Libor Rates: 1 mo 0.153%; 3 mo 0.234%; 6 mo 0.330%; 1 yr 0.582%
30 yr FNMA 3.5 Oct: @9:30 101.41 -6 bp (-22 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Oct: @9:30 102.67 -14 bp (-25 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Oct: @9:30 102.67 -3 bp (-11 bp frm 9:30 yesterday)
Dollar/Yen: 108.73 +0.36 yen
Dollar/Euro: $1.2894 +$0.0029
Gold: $1221.30 -$14.60
Crude Oil: $94.44 +$0.02
DJIA: 17,239.73 +82.88
NASDAQ: 4587.22 +25.03
S&P 500: 2009.41 +7.84