Rate snapshot: MBS prices lower, markets rattle on Iraq news

by Ryan Smith13 Jun 2014


It is Friday the 13th, and there is a full moon; that doesn’t happen very often; the last time October 2000. The fear of Friday the 13th is known…..wait for it….as paraskevidekatriaphobia!
Early trades had MBS prices lower, the 10 yr note yield up 2 basis points and US stock indexes about unchanged from yesterday. At 8:30 May PPI; overall expectations were for the overall and core to be up 0.1%. PPI in May declined 0.2%,  the core -0.1% (ex food and energy). The decline was the first in 3 months and confirms there is little pricing power in the US as well as around the globe. In the EU their inflation rate is 0.5%; yr/yr in the US PPI is up 2.0% according to the Labor Dept. The May PPI decrease followed a 0.6% gain the prior month. The core in April was up 0.5%. The PPI report this year expanded to measure 75 percent of the economy, compared to about a third for the old metric, which tallied the costs of goods alone. Following its first major overhaul since 1978, PPI now measures prices received for services, government purchases, exports and construction.
Yesterday markets were rattled on news out of Iraq that militants were gaining control of northern cities and were moving toward Baghdad. It is an ethnic issue between Sunni extremists eclipsing the power of Iraq's Shiite-dominated rulers, Shiite Iran sprang into action to aid its besieged Arab ally. It deployed Revolutionary Guards units to Iraq. US stocks fell, but the indexes were already suspect; crude oil increased over $2.00 on knee jerk reaction that oil supplies may be impacted. From what we hear Iraq oil may be threatened but with increased oil production in the US since the Iraq war has increased enough that a shortage is unlikely. For the moment, similar reactions in financial markets similar to Ukraine/Russia is supporting the bond market, also like Ukraine/Russia the fear factor will abate unless the US sends ground troops, and that is extremely unlikely. The 10 yr yield fell 4 bps on the news yesterday, early this morning its yield is up 2 bps from yesterday, suggesting little concern at the moment. In the wider perspective though, the situation in the Mid-East is gaining increase concern in the political sphere.
….”A militant Islamist group that has carved out control of a swath of Syria has moved into Iraq, conquering cities and threatening the Iraqi government the U.S. helped create and support with billions of dollars in aid and thousands of American lives. The group—known as the Islamic State of Iraq and al Sham—isn't a threat only to Iraq and Syria. It seeks to impose its vision of a single radical Islamist state stretching from the Mediterranean coast of Syria through modern Iraq, the region of the Islamic Caliphates established in the seventh and eighth centuries….” WSJ
At 9:30 the DJIA opened +20, NASDAQ +15, S&P +3; 10 yr at 2.63% +3 bp and 30 yr MBS prices down 23 bps from yesterday’s close. Yesterday in the last hour of bond and MBS trading (4:00 to 5:00 pm) MBS prices declined about 10 basis points from the levels we reported at 4:00. Given the trading in stocks and treasuries so far this morning, the knee jerk reaction yesterday on the Iraq news has waned.
The last of the data at 9:55; the U. of Michigan consumer sentiment index was expected to have increased to 83.0 from 81.9 at the end of May. The index fell to 81.2, not what the bulls would like to have seen but t is a very volatile series. The initial reaction took the DJIA from unchanged down 10 points. So far this morning, and it is early, there has been no directional movement in the stock market. The 10 yr note yield and MBS prices have gained a little from 9:30 levels.

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