Rate snapshot: Interest rates continue decline, corporate profits best in years

by MPA28 Aug 2014

Interest rates continue their decline this morning;
the 10 yr at 2.33% at 8:30 and likely headed to test 2.30%, the intraday low on 8/15. US and Europe’s stock markets lower this morning after the S&P 500 index tested, but could not hold 2000. Two data points at 8:30 didn’t have any initial impact on rates or the stock index trading. Q2 GDP revision was better than we and markets thought, increasing frm 4.0% to 4.2%. Weekly jobless claims about where they were expected, down 1K to 298K. Increased tensions in Ukraine are adding to, and trumping the economic data so far this morning. European stocks dropped from a one- month high, U.S. equity-index futures declined, gold climbed and the ruble slid as evidence mounted that Russia has sent troops to fight in Ukraine.
Corporate profits in Q2 were the best in 4 yrs, helping GDP increase. The consensus was a decline to 3.9%; we were looking for 3.5%. The growth last quarter came from bigger gains in corporate spending on structures and equipment and a smaller trade deficit that was partly offset by more tepid inventory building. Business investment increased at an 8.1% annualized rate, the most since the first three months of 2012. Household consumption, which accounts for about 70% of the economy, grew at a 2.5% annualized rate, the same as previously estimated. Consumers’ purchasing power improved, with disposable income adjusted for inflation rising at a 4.2% from April through June after a 3.4% gain in the first quarter.
The better GDP normally would be a pressure point for the rate markets; not so this morning so far as Ukraine/Russia is back in the spot light. Two days ago there were optimistic views after Putin and Ukraine president met to discuss the issue of the separatists. Reports out this morning saying Russia now has 1000 Russian troops in Ukraine; a war by any other definition. Kiev said Russian forces have seized the coastal town of Novoazovsk and several villages near the border with Russia, part of a wider assault on a new front. The U.S. ambassador to Kiev issued a statement today that Russia was now directly involved in fighting.
In Europe an index of executive and consumer sentiment declined; the index is now the lowest this year and was worse than what economists were expecting. Spanish consumer prices dropped the most in five years and German unemployment unexpectedly rose. Inflation in Europe now the lowest going back to 2009 and confirms Mario Draghi’s concern that the EU may be headed for deflation and more economic decline. Germany’s Federal Labor Agency said the number of people out of work unexpectedly climbed a seasonally adjusted 2,000 to 2.901 million in August. Economists forecast a decline of 5,000, according to the median of 30 estimates in a survey. The Bundesbank has warned that an anticipated rebound in the second half of the year is now in doubt. The German economy, the best in Europe, is now slowing and portends worsening for all of the EU. The ECB will meet next week; likely there will be another QE move.
While the US is doing OK, the rest of the world isn’t. The Fed wants to begin increasing rates next year but with the rest of the world not in such good shape Yellen has to take that into consideration in determining when to start increasing the FF rate. Even if the Fed does start increasing as expected, the increase will be so minor that it may not have any impact on lending or markets.
Germany’s 10-year yields added to declines today, dropping to an all-time low 0.87%. The rate on similar-maturity French bonds slid to 1.22%. The low rates are obviously unprecedented and are taking US rates down with them; US treasuries are the best buy in the world right now; our rates a lot higher than most al other good sovereign debt, the highest of the average of all G-7 economies.
At 9:30 the DJIA opened -68, NASDAQ -19, S&P -8. 10 yr at 2.33% -3 bp and 30 yr MBSs at 9:30 +14 bps.
At 10:00; July pending home sales, expected up 0.5%, increased 3.3% but still down yr/yr 2.1%.
This afternoon Treasury will auction $29B of 7 yr notes. The demand will likely be strong as US rates are much higher than anywhere else.
Europe sliding, Russian troops now in the Ukraine and fighting, the Islamic State is becoming more than just a terrorist faction; all of these issues trump all else this morning. The 10 yr at 2.33% will very likely test the recent low at 2.30%, on 8/15 that rate got a run but quickly backed off. If the 10 closes under 2.30% we expect it will continue lower quickly; declining below the recent low that held previously will likely force many of the shorts to finally capitulate. Geo-politics and the ECB about to start another QE next week are supportive of even lower rates. All technical readings for the bond market continue to their very positive biases.
PRICES @ 10:00 AM
10 yr note: +7/32 (22 bp) 2.33% -3 bp
5 yr note: +3/32 (9 bp) 1.64%-2 bp
2 Yr note: unch 0.51% unch
30 yr bond: 22/32 (69 bp) 3.07% -4 bp
Libor Rates: 1 mo 0.156%; 3 mo 0.238%; 6 mo 0.329%; 1 yr 0.564%
30 yr FNMA 3.5 Sept: @9:30 102.97 +17 bp (+20 bps frm 9:30 yesterday)
15 yr FNMA 3.0 Sept: @9:30 103.62 +8 bp (+17 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Sep: @9:30 104.05 +20 bp (+23 bp frm 9:30 yesterday)
Dollar/Yen: 103.74 -0.14 yen
Dollar/Euro: $1.3161 -$0.0032
Gold: $1292.40 +$9.00
Crude Oil: $94.46 +$0.58
DJIA: 17,059.66 -62.35
NASDAQ: 4556.13 -13.49
S&P 500: 1994.92 -5.20


Should CFPB have more supervision over credit agencies?