A slightly better start this morning; both US stock indexes and the bond market were better early. The US bond market benefiting frm the relative value between EU and US rates. The difference between yields on 10-year U.S. notes and similar maturity German bunds increased to the most in 15 years. European government bonds surged, pushing yields from Germany to Spain down to records, after Mario Draghi signaled more stimulus.
This week is full of key economic data and it precedes the long and last Summer holiday next Monday. Trading volume will continue to be thin as has been the case the last couple of weeks. Last week’s Jackson Hole symposium with Yellen and Draghi signaling interest rates will stay low for longer than what the markets were thinking last week. Keeping in perspective; there is no conviction in markets that lasts more than a few days about when the Fed will increase rates; the estimates swing with each key economic report. In more direct terms, traders continue to bet a hike is coming; the short end and middle of the yield curve compared to the long end rates are increasing suggesting the Fed will increase rates next year; it is only the timing that gets all the interest as if moving the Fed fund rate up in April or June makes a difference. The spread of 30-year yields over two-year ones contracted to 264 basis points, or 2.64 percentage points, the narrowest since May 3, 2013. The difference was as wide as 367 basis points in November.
This week has a lot of data and Treasury auctions to work through. The geo-political issues are still a factor and may pick up a little this week. We noted to keep an eye on Syria two weeks ago; it is now back in the headlines. ISIS, or The Islamic State as they call themselves, captured a major air base in northeastern Syria, marking another strategic gain and an end to any presence of Syrian regime forces in the province of Raqqa ( not sure where that is but it doesn’t matter). Pressure now for Obama to do more. Russian foreign minister said his country also hopes to discuss a political resolution of the conflict in Ukraine at a meeting between Russian and Ukrainian presidents as well as European Union officials in Minsk, Belarus, on Tuesday. Libya's Islamist militias said they have consolidated their hold on Tripoli and its international airport, driving out rival militias to the outskirts of the capital. Israel and Hamas continue to launch missiles, no market interest in that situation though.
The only scheduled data today; July new home sales, expected up 5.6%, as reported sales were down 2.4% to 412K; however June sales were revised frm 406K to 422K. Not good but also not bad. New home sales are contracts signed not closed; in new construction there is a little more volatility in the month to month data. That said, the housing market---no matter how it is spun----is nowhere near the levels we used to consider normal. While not normal given the stupid lending that drove markets, in 2005 the annualized units hit 1.23 mil. The initial reaction drove the stock indexes higher, the 10 yr note and MBS prices little changed although MBS prices did improve a little.
The 10 is still holding positive technical readings on all of our studies and models. If you are looking for reasons why, the decline in interest rates in Europe, geo-political uneasiness and the ECB about to add more stimulus. Global economies slowing, all but here in the US. At these lows it will take a lot to drive rates lower (a lot of fear, a strong sell-off in the stock market); at the moment those factors are not there. As we always remind, keep the fundamentals in mind but do not turn against how the market is actually performing. Last week rates edged a little higher (the 10 to 2.40% frm 2.35% from the week prior, 30 yr MBS prices -24 bps in price); not a significant change. The 10 yr is stable while the averages are moving closer; unless rates begin moving lower soon the entire picture could change to bearish; for now the 10 has good support at 2.40%.
START BY FLOATNG ALTHOUGH KEEP ALERT, WE WILL LET YOU KNOW IF PRICES FALL SO YOU DON’T HAVE TO WATCH THE SCREEN ALL DAY.
This Week’s Economic Calendar:
10:00 am July New Home Sales (+5.6% to 430K)
Dallas Fed Activity index (13.5 frm 12.7)
8:30 am July durable goods orders (+5.1%, ex transportation +0.4%)
9:00 am June Case/Shiller 20 city (Yr/yr +8.4%)
June FHFA home price index (+0.3%)
Aug consumer confidence index (89.5 frm 90.9)
1:00 pm $29B 2 yr note auction
7:00 am weekly MBA mortgage applications
1:00 pm $35B 5 yr note auction
8:30 am weekly jobless claims (+2K to 300K)
Q2 preliminary GDP (+4.0%, unch frm the advance report; deflator +2.0% also unch)
10:00 am July pending home sales (+0.5%)
1:00 pm $29B 7 yr note auction
8:30 am July personal income and spending (income +0.3%, spending +0.2%; PCE core prices +0.1%)
9:45 am Aug Chicago Purchasing Mgrs. index (56.4 frm 52.6)
9:55 am U. of Michigan final Aug consumer sentiment index (80.5 frm 79.2)
PRICES @ 10:15 AM
10 yr note: +4/32 (12 bp) 2.39% -1 bp
5 yr note: unch 1.66% unch
2 Yr note: -1/32 0.50% +1 bp
30 yr bond: +8/32 (25 bp) 3.14% -2 bp
Libor Rates: 1 mo 0.155%; 3 mo 0.238%; 6 mo 0.330%; 1 yr 0.565%
30 yr FNMA 3.5 Sept: @9:30 102.66 +7 bp (+11 bp frm 9:30 Friday) 4.0 coupon 105.81 +8 bp (+8 bp frm 9:30 Friday)
15 yr FNMA 3.0: @9:30 103.43 +6 bp (+10 bp frm 9:30 Friday)
30 yr GNMA 3.5 Sept: @9:30 103.77 +10 bp (+7 bp frm 9:30 Friday) 4.0 coupon 106.50 +9 bp (+5 bp frm 9:30 Friday)
Dollar/Yen: 103.97 +0.02 yen
Dollar/Euro: $1.3203 -$0.0039
Gold: $1278.90 -$1.30
Crude Oil: $93.24 -$0.41
DJIA: 17,098.16 +96.94
NASDAQ: 4564.06 +25.51
S&P 500: 1999.01 +10.61