Rate snapshot: Russia/Ukraine rhetoric and keeping an eye on China

by MPA23 Apr 2014

A little better start this morning ahead of March new home sales at 10:00; the 10 at 9:00 at 2.70% -2 bp and 30 yr MBS price +9 bps from yesterday’s 8 bp gain.
Not much change in the bond and mortgage markets after last Thursday’s spike higher in rates. US interest rates remain tethered in a very tight range that has now lasted almost three months. Most talk and most of the outlooks are looking for higher rates by the end of the year, so far though, since the beginning of February long term rates have been generally unchanged; at the end of January the 10 yield traded at 2.70%, the same as today.
Markets still keeping an eye on the Russia/Ukraine situation; no serious change this morning, more rhetoric and posturing but so far no major military responses from either country. Russia’s foreign minister out today saying any attack on Russians in Ukraine will be perceived as an attack against Russia;  Ukraine called for a renewal of a stalled military operation against pro-Russian forces that have taken over several eastern cities. Drawing parallels to tensions that kicked off Russia's 2008 conflict with Georgia, Mr. Lavrov said the country will respond if the interests of the Russian people are harmed in Ukraine the same way they were in South Ossetia. "Russian citizens being attacked is an attack against the Russian Federation," he said. To some minor extent the turmoil has been a support for US treasuries, although we see it as very small. No inflation, concerns of deflation and some concern that the US stock market may be headed for a retreat soon have kept interest rates from increasing.
Another weak applications week for mortgages; slice it anyway you want, believe any data you like, but the housing sector at best is struggling along. Mortgage applications decreased 3.3% from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 18, 2014. The Refinance Index decreased 4% from the previous week.  The seasonally adjusted Purchase Index decreased 3% from one week earlier and was 18% lower than the same week one year ago. The refinance share of mortgage activity decreased to 51% of total applications from 52% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 9% of total applications. The average loan size for purchase applications has reached its highest level in the history of the survey at $280,500, coinciding with the trend in rising purchase activity for larger loan amounts. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.49% from 4.47%, with points increasing to 0.50 from  0.32 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.41% from 4.39%, with points increasing to 0.34 from 0.18 (including the origination fee) for 80% loans.  The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.20% from 4.14%, with points increasing to 0.41 from 0.06 (including the origination fee) for 80% loans.  The average contract interest rate for 15-year fixed-rate mortgages increased to 3.55% from 3.54%with points increasing to 0.33 from 0.24 (including the origination fee) for 80% loans.
Keeping an eye on China; this morning the preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was 48.3 in April, matching the median estimate of analysts surveyed by Bloomberg News. The reading rose from March’s final figure of 48 while remaining below the expansion-contraction dividing line of 50. China’s economy has and likely will continue to slow after years of double digit GDP gains. A soft China is another small motivation for low US interest rates. Not that it should be necessary; another reminder that we live in a global economic world; what happens in China does have a direct impact on our economy. Here in the US of A the Markit PMI Flash index was weaker than expected; at 55.4 from 55.5 in March but the estimates were for the index to be 56.3.
At 9:30 the DJIA opened -10, NASDAQ -6, S&P -2; 10 yr 2.70% -2 bp and 30 yr MBS price +11 bps from yesterday’s close.
March new home sales at 10:00 were expected to have increased 3.3% from Feb to 455K units; as reported sales were down a whopping 14.5% to 384K. Yesterday there was talk among pundits that the housing sector as in decent shape, we have continued to believe the sector is struggling and that is going to be felt across the markets. There is no significant increase in the economic reports, housing is slowing rapidly and that is with very low interest rates. It doesn’t matter much about the reasons builders can’t sell homes, it only matters that sales are very slow. The median sales price at $290K is up from $257K a year ago. This data is very disturbing, especially for the economic outlook. How much weaker would the sector be if those higher rate forecasts had occurred?
At 1:00 Treasury will auction $35B of 5 yr notes, yesterday’s 2 yr was just so-so, the 5 yr has a little more interest to the long end of the curve. Each month Treasury is borrowing $163B to fund the deficit that is used to fund the various deficit spending initiatives promulgated by Congress and the Administration. No one pays a lot of attention to the eventual implications of the exploding US debt; someday down the long line, it will lead to a day of reckoning for the US and other sovereign countries, but that is for another time.
Technically the bond and mortgage markets are trendless these days; most of the momentum oscillators are reading neutral, not bullish or bearish. How long this three month narrow ranges will hold is difficult to forecast. Much has to do with the equity market performance; as long as there is no serious reversal in the outlook for the stock market rates won’t decline much; conversely, if our outlook for a stock market correction is correct rates will slip. But how much does it really matter? The housing market is as soft as pudding even with these low rates. Housing is becoming unaffordable for many as the middle class is declining in terms of incomes.

RateSnapshot courtesy of TBWSratealert.com


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