April housing starts and building permits were better than expected this morning at 8:30. Starts were expected to be up 3.5% at 980K units; as reported starts jumped 13.2% to 1.027 mil units. Building permits were thought to be up 3.0% to 1.020 mil but increased 8.7% to 1.080 mil units. April was the best reading since last November. The headlines are good but when we look solely at single family starts, not so much; the increase in housing starts was dominated by multifamily construction, such as condominiums and apartment buildings, which increased almost 40% to a 423,000 annual rate from 303,000 in March. Work on single-family properties rose 0.8 percent to a 649,000 rate in April from 644,000 the prior month. Consumers are still not stepping up to buy new homes or existing homes; the first time buyer isn’t there and likely to be reticent to purchase with the economy struggling. The initial reaction sent bond prices lower and rates a little higher; stock indexes didn’t react at all to the data.
Tuesday thru yesterday interest rates fell quickly as investors increasingly realize the US, EU, and China’s economies are not growing much. Mix in the Ukraine/Russia situation and belief that the ECB is about to begin a fresh round of buying EU debt similar to the Fed’s monthly purchase of treasuries and MBSs. Then add in that central banks have taken a huge amount of tradable notes and bonds out of the market with the QEs that is leading to a supply shortage. The run-up in prices for MBSs and treasuries has been excessive recently and likely will spend a few days consolidating the increases before another round of buying. We expect interest rates have the potential of further declines in rates, MAYBE the 10 down to 2.30%.
Until May25th when Ukraine holds its presidential election there is little that will occur in the area. In the meantime NATO says Putin, who annexed Crimea in March, still has 40,000 troops on Ukraine’s border and hasn’t fulfilled a promise last week to pull them back. The U.S. and the U.K. vowed yesterday to punish Russia with industrywide sanctions if the presidential election is undermined as the Kiev government’s forces moved to flush out separatists in the east. UN monitors criticized “repeated acts of violence against peaceful participants of rallies, mainly those in support of Ukraine’s unity” as well as “targeted killings, torture and beatings, abductions, intimidation and some cases of sexual harassment –- mostly carried out by well-organized and well-armed anti-government groups in the east.” In eastern Ukraine, government troops eliminated two rebel bases near the towns of Slovyansk and Kramatorsk, acting President Oleksandr Turchynov said yesterday.
The DJIA opened -5, NASDAQ-1, S&P unchanged; 10 yr 2.52% +2 bp, 30 yr MBS price -13 bps.
The last of this week’s data; at 9:55 the U. of Michigan mid-month consumer sentiment index. Forecasts were for a slight increase from 84.1 to 84.5; the index declined to 81.8; weaker but not likely to have any major impact on markets.
Taking a breather today, the bond and mortgage markets need a rest. Investors and traders usually don’t want to chase a market after rapid and large moves such as we have experienced in the bond and mortgage markets over the last three days. We believe rates will continue to move lower, however prior to another run lower in rates some rebound can be expected. It is Friday, nothing is likely in Ukraine over the weekend; we are not expecting much change in the bond and mortgage markets today.
PRICES @ 10:00 AM
10 yr note: -9/32 (28 bp) 2.52% +2 bp
5 yr note: -5/32 (15 bp) 1.56% +2 bp
2 Yr note: -1/32 (3 bp) 0.37% +1 bp
30 yr bond: -17/32 (53 bp) 3.35% +2 bp
Libor Rates: 1 mo 0.151%; 3 mo 0.225%; 6 mo 0.323%; 1 yr 0.534%
30 yr FNMA 4.0 June: @9:30 105.33 -13 bp (-21 bp frm 9:30 yesterday)
15 yr FNMA 3.0 June: @9:30 103.70 unch (-10 bp frm 9:30 yesterday)
30 yr GNMA 4.0 June: @9:30 106.41 -16 bp (-23 bp frm 9:30 yesterday)
Dollar/Yen: 101.54 -0.04 yen
Dollar/Euro: $1.3717 +$0.0007
Gold: $1291.20 -$2.40
Crude Oil: $101.78 +$0.28
DJIA: 16,454.20 +7.39
NASDAQ: 4061.63 -7.66
S&P 500: 1870.22 -0.63