Treasuries and MBSs opened stronger this morning with the 10 falling to 2.59% and testing its recent low at 2.58%. At 9:00 MBS price +9 bps from Friday’s close and 29 bps better than at 9:30 Friday morning. This is a big week for the bond and mortgage markets; a number of reports on the housing sector, the final Q1 GDP, PCE reported with May personal income and spending, Treasury auctioning $94B of notes.
Last Tuesday after months of generally ignoring any immediate concern that inflation would increase, the May CPI jumped to +2.2% yr/yr. The increase shook investors and traders, then Janet Yellen on Wednesday commented that the higher inflation in May was in her opinion just ‘noise’ within the data, taking a little sting from the CPI. On Thursday then, the Philadelphia Fed reported that the prices paid component in its business index increased 12 points to 35 from 23; once again inflation fears increased. It doesn’t take a lot to ignite inflation concerns with long term interest rates at these current low levels; inflation is the kiss of death for investors holding fixed income investments. Last week Treasury auctioned inflation indexed notes, the rate bid translated to the auction suggests investors are now expecting 2.28% inflation over the next year. Some now changing their outlook for when the Fed would begin increasing rates from mid-2015 to the first quarter of 2015. Stay tuned as undoubtedly inflation is now make on investor and traders radar. The next look at inflation is Wednesday with the Q1 GDP data, and Thursday with personal income’s PCE.
At 9:30 the DJIA opened -14, both NASDAQ and S&P were unchanged; the 10 yr note at 2.60%, up from 2.59% at 9:00, 30 yr MBS price +3 bp, down from +9 at 9:00.
May existing home sales at 10:00; estimates were for an increase of 2.2% from April to 4.75 mil units (annualized). As reported sales increased 4.9% to 4.89 mil; the mid-west was where most al the gains were from. The median sales price $213,400, up 1.% from April and +5.1% yr/yr the slowest yr/yr increase since April 2012. Based on the pace of sales in May there is a 5.6 month supply. Still no increase in first home buyers; we believe first home buyers are not going to step up compared to previous housing market rebounds. Young people do not have the same drive to buy as they used to have before the recession; too much debt, can’t save enough for a down payment, and tight credit and low incomes.
Around the world:
- A preliminary Purchasing Managers’ Index for China, the biggest consumer of industrial metals, rose to 50.8, exceeding the 49.7 median estimate of analysts in a Bloomberg survey.
- The euro-area PMI composite gauge slipped to 52.8 in June, less than the 53.4 reading from the median of 25 estimates in a Bloomberg survey of economists.
- Fighters from an al-Qaeda breakaway group seized all Iraq’s border crossings with Jordan and Syria. Kerry headed for Baghdad today.
- Obama told CBS in an interview that will be aired in full today that the conflict could spread to other countries, including Jordan. The militants “are engaged in wars in Syria where -- in that vacuum that’s been created -- they could amass more arms, more resources,” Obama said, according to a transcript.
- European Union countries accused Russia of continuing to let fighters and weapons flow into Ukraine and demanded President Vladimir Putin make good on a pledge to back a plan for a truce as fighting continued.
- Brent oil traded near the highest level since September and West Texas Intermediate was little changed as militants in Iraq seized more territory and President Barack Obama warned that the crisis may spill over into other countries.
We are still getting neutral technical reads on our data; the 10 yr is quiet and has been that was since early June. A mixed set of circumstances; Iraq and Ukraine are on the radar being monitored daily but so far the US markets are not being directly impacted. Inflation was resurrected last week but Janet Yellen took the other side of that view. The 10 has strong resistance at 2.58% and strong support at 2.66%. All of our models are neutral now, not bullish and not bearish. The 10:00 repot of stronger May existing home sales took a little out of the rate markets and stopped the selling that was taking stock indexes lower.
This Week’s Economic Calendar:
10:00 am May existing home sales (4.75 mil, +2.2%), +4.9% as reported 4.89 mil
9:00 am Apr Case/Shiller home price index (20 city yr/yr +11.4% from +12.4% in March)
Apr FHFA home price index (+0.5%, down from +0.7% in March)
10:00 am May new home sales (440K, +1.8%)
June consumer confidence index (83.7 from 83.0 in May)
1:00 pm $30B 2 yr note auction
7:00 am weekly MBA applications
8:30 am May durable goods orders (+0.4%, ex transportation orders +0.3%)
Q1 final GDP (-1.8% from -1.0% on the prelim; GDP deflator +1.3% unch from the prelim)
1:00 pm $35B 5 yr note auction
8:30 am weekly claims (-2K to 310K)
May personal income and spending (income and spending both +0.4%; core PCE +0.2%)
1:00 pm $29B 7 yr note auction
9:55 am June U. of Michigan consumer sentiment index (81.9 from 81.2 from 2 weeks ago)