Rate snapshot: Interest rates fall on Ukraine news, Yellen concerned about labor market slack

by MPA18 Aug 2014

Ukraine and Russian officials are talking;
the talks between the Ukraine foreign minister and the Russian foreign minister meeting in the Balkans over the weekend. The Ukraine foreign minister saying the talks went well but he called on the Russian diplomat to follow up the words with actions. In Iraq the Kurds made progress by re-taking the Mosul Dam as the US increased air strikes. The two situations being momentarily better sent Europe’s stock markets higher in strong rallies and in turn drove US stock indexes futures higher ahead of the 9:30 open. At 9:00 the DJIA along with the other two key indexes was pointing to a much better open. The interest rate markets, with easing tensions, are starting higher in rates and lower prices.
Friday on reports Russian troops had crossed the Ukraine border and Ukraine forces destroyed them sent interest rates to the lowest levels this year; the 10 yr at one point declined to 2.31% before edging back to 2.35% at the close. MBS prices were better on Friday, being supported by the move in treasuries on safety buying. Last week most of the rate declines were in treasuries, the 10 yr yield fell 7 bps, the price increased 81 bps while MBS price gained 30 bps.
There are a few key economic reports this week (see calendar below) and the geo-political issues are still there but much of the focus this week will be debating how Janet Yellen will frame her opening address at the annual Kansas City Fed Jackson Hole conference of leading global central bankers and finance ministers that kicks off on Friday. Chatter this week among the Fed watchers will focus the discussion on whether the Fed is going to error by keeping interest rates low too long, or should the Fed move to increase rates before inflation gets a foot in the door. Today there is no inflation to be concerned with but historically inflation has infected markets before the Fed actually moves to control it; usually too late. This time, for all the talk that employment is increasing, consumers are beginning to spend and the economic outlook is improving; we do not see it, or any evidence that housing is improving or wages are increasing. Yellen has warned she is concerned about the “slack” in the labor market, another way of phrasing the reality that most new jobs are at the lower end of the pay scale. On Wednesday the FOMC minutes frm the last meeting will be released; with Yellen speaking on Friday the minutes won’t be as important as usual.
The DJIA opened +91 at 9:30, NASDAQ +24, S&P +10. 10 yr note 2.37% +2 bp; 30 year MBS prices -13 bps frm Friday’s close.
The only report today; the August NAHB housing market index; expected unchanged at 53, was better, at 55. Most of the improvement came frm the increase in the mid-west region. No reaction to the better report.
In our 4:30 report last Friday we noted that this week will likely be more volatile from day to day. The geo-political situations are alive and well but subject to constant changes; no daily tensions equals no bond buying, increased tensions better for the bond and mortgage markets. The economic data this week as housing starts and permits for July, existing home sales for July. Not news to our readers, the housing sector in most of the country remains soft. No excuses now about the level of interest rates being too high, or tight credit; consumers are not stepping up. That said, a few minutes ago the August NAHB housing market index was expected unchanged at 53, as reported it increased to 55, the sales index ncreased 3 points to 58. Looks good----but---Fannie Mae out this morning saying it does not expect the sector to improve this year. Mixed information; but the consensus is still for the housing sector to be soft and not lead economic improvement. Note the anticipated improvements on starts and permits that will be reported tomorrow.
This Week’s Economic Calendar:
9:50 am NAHB Aug housing market index (as reported 55, up frm 53 in July)
8:30 am July CPI (+0.1%, ex food and energy +0.2%)
July housing starts and permits (starts +7.3% to 964K units; permits +4.8% to 1001 mil units)
7:00 am weekly MBA mortgage applications
2:00 pm FOMC minutes frm 7/30 meeting
8:30 am weekly jobless claims (-11K to 300K)
10:00 am July existing home sales (-0.8% to 5.00 mil)
August Philadelphia Fed business index (20.0 frm 23.9)
July leading economic indicators (+0.6% frm +0.3% in June)
Treasury markets soft this morning on relaxing tensions in Ukraine and Iraq; MBS prices lower but not being hit as badly as treasuries; treasuries have improved more than MBSs, we expect activity to be more aggressive in treasuries than MBSs as is the case when rates decline; all about safety and less about economic and inflationary outlooks these days. The bond market remains bullish; it will take a move above 2.50% to change that; a wide range. We said Friday we expected the 10 yr would see selling with the near term very overbought as long as geo-political issues settle as they have so far today.
PRICES @ 10:15 AM
10 yr note: -11/32 (34 bp) 2.38% +3 bp
5 yr note: -5/32 (15 bp) 1.58% +3 bp
2 Yr note: unch 0.41% unch
30 yr bond: -24/32 75 bp) 3.18% +4 bp
Libor Rates: 1 mo 0.155%; 3 mo 0.231%; 6 mo 0.329%; 1 yr 0.550%
30 yr FNMA 3.5 Sept: @9:30 102.72 -13 bp (+3 bp frm 9:30 Friday) 4.0 coupon 105.73 -9 bp (-3 bp frm 9:30 Friday)
15 yr FNMA 3.0 Sept: @9:30 103.51 -13 bp (+2 bp frm 9:30 Friday)
30 yr GNMA 3.5 Sept: @9:30 104.16 -15 bp (+4 bp frm 9:30 Friday) 4.0 coupon 106.64 -9 bp (-1 bp frm 9:30 Friday)
Dollar/Yen: 102.58 +0.22 yen
Dollar/Euro: $1.3367 -$0.0034
Gold: $1298.00 -$8.20
Crude Oil: $96.13 -$1.22
DJIA: 16,802.87 +139.96
NASDAQ: 4500.25 +35.32
S&P 500: 1969.35 +14.29


Should CFPB have more supervision over credit agencies?