Rate Snapshot: Even weak economic data, Japan's recession isn't motivating MBS buying

by MPA17 Nov 2014

By David Shirmeyer, CEO at Sigma Research

The bond and mortgage markets opened better this morning; the key stock index futures trading early pointed to a slightly weaker 9:30 open. The 10 at 9:00 at 2.30% down 2 bps and 30 year MBS prices +8 bps from Friday’s close and +27 bps better than at 9:30 last Friday.


Japan fell into recession based on its recent GDP data, one more global economic giant sliding. China’s growth declining but still no recession; Europe for all intents is in recession; Latin America moving closer to recession. Nevertheless the US is still expanding although Q3 will show weaker growth than Q2; Q3 outlook, +3.5% from 4.6% growth in Q2. Traders have to be concerned that with the global economies slowing, how much more growth can we expect in the US? With the global slowing the US exports have to slow, the worry now is, will the global declines push US growth down?


After little in the way of economic data last week; this week has a number of key reports. This morning the Nov. NY Empire State manufacturing index, expected at 10.3 from 6.17 in Oct, was up to 10.16, slightly weaker but still better than the previous month. Oct leading economic indicators for Oct was thought to be +0.2%, as reported -0.1%. Oct industrial production expected +0.2% declined to -0.1% (Sept industrial production +0.8% from +1.0% originally reported). Oct capacity utilization expected at 79.3%, as reported 78.9% and Sept revised from 79.3% to 79.2%. Manufacturing expected up 0.3%, as reported +0.2%, and Sept manufacturing use revised from +0.5% to +0.2%. Three weaker than expected measurements but these days’ investors don’t care; at 9:30 the DJIA opened -12, NASDAQ -10, S&P -3. The 10 at 9:30 2.31% -1 bp, earlier the note traded at 2.30%; and 30 year MBS price3 bps after being +10 earlier.


Japan is back in recession, for the third time in four years. A sales tax increase stopped purchases; there were no forecasters that expected this. The third largest economic engine in the world is slowing. Two weeks ago Japan surprised the world with a massive stimulus package; today it shocked markets dropping back into recession. Does it matter here in the US, doesn’t look like it; investors and traders ignoring it as is the situation with our equity markets---nothing stops our markets from climbing higher.  Doubts about whether further monetary stimulus will really do much to lift Japan’s growth, or whether one immediate result — a weakening yen — is doing more harm than good, at least for some families and companies, by pushing import costs higher than growth in wages or profits.


15 trading sessions; the 10 has held between 2.39% and 2.30%, no movement of substance in either direction with most economists and analysts still convinced interest rates will move higher before the end of the year. Last week another Bloomberg poll of economists said the 10 would trade at 2.60% by the end of this year. In my judgment that will not happen, no way I can justify or understand how that kind of a forecast has any merit. There is absolutely no inflation anywhere near the radar, the Fed isn’t going to increase rates until at least Q3 2015, and that is still a serious question. Global interest rates are still higher than US long term rates adding more demand for US 10s, (German 10 year rate 0.77%)


This Week’s Economic Calendar:


             8:30 am Nov NY Fed Empire State manufacturing index (10.3 from 6.17; as reported 10.30)

             9:15 am Oct industrial production (+0.2% from +0.8%; as reported -0.1%)

                          Oct capacity utilization (79.3% unch from Sept; as reported 79.3%)


             8:30 am Oct. PPI (-0.1%, core +0.1%)

            10:00 am NAHB Nov. housing market index (55 from 54 in Oct.)


            7:00 am MBA weekly mortgage apps.

            8:30 am October housing starts and permits (starts +1.1% to 1028K: permits +1.7% to 1035K)

            2:00 pm FOMC minutes from Oct meeting


            8:30 am weekly jobless claims (-6K to 284K)

                         Oct CPI (-0.1%, core +0.1%)

           10:00 am Oct existing home sales (-0.4% at 5.15. mil)

                          Nov Philadelphia Fed business index (18.0 from 20.7 in Oct)

                          Oct leading economic indicators (+0.5%, +0.8% in Sept)


PRICES @ 10:10 AM

10 year note:                   -3/32 (9 bp) 2.33% +1 bp

5 year note:                     -2/32 (6 bp) 1.62% +2 bp

2 Year note:                    unch 0.51% unch

30 year bond:                 -5/32 (15 bp) 3.06% +2 bp

Libor Rates:                1 month 0.154%; 3 month 0.232%; 6 month 0.326%; 1 year 0.566%

30 year FNMA 3.5 Dec:   @9:30 103.42 +3 bp (+22 bp from 9:30 Friday)

15 year FNMA 3.0 Dec:   @9:30 104.10 +9 bp (+24 bp from 9:30 Friday)

30 year GNMA 3.5 Dec:   @9:30 104.50 -4 bp (+32 bp from 9:30 Friday)

Dollar/Yen:                  116.49 +0.20 yen

Dollar/Euro:                $1.2457 -$0.0068

Gold:                          $1184.30 -$1.30

Crude Oil:                  $74.86 -$0.96

DJIA:                          17,617.92 -16.82

NASDAQ:                   4679.62 -8.92

S&P 500:                    2037.16 -2.66