Interest rates continue to decline this morning; at 8:30 the NY Empire State manufacturing index was weaker than expected at 14.69 frm a strong 25.6 in June, the consensus was 20.0. The July PPI was in line, +0.1% frm 0.4% in June, the core (ex food and energy) +0.2%; yr/yr PPI +1.7%, yr/yr core +1.6% both well under the Fed’s 2.0% target. US stock indexes also started better this morning, with the present new belief the Fed and ECB will not increase rates as soon as was expected as the US and global economies are showing some softness. No increase in retail sales in July, an increase in weekly jobless claims and both Wal-Mart and Macy’s showing weakness in sales; Wal-Mart even lowering its forward guidance; if Wal-Mart is slowing that is not a positive sign for consumer sales.
In Europe this week Germany’s GDP declined to -0.2%, Italy is in recession and France reported no growth in the quarter. The ECB has to step UP with massive stimulus in an effort to stop the slide and try to reverse the increasing deflationary signs. On the Ukraine thing; EU officials warning Russia not to enter Ukraine territory with military equipment. Ukraine said Russia continues to supply rebels in the east of the country with equipment and that military vehicles had crossed over the border under cover of darkness. Russia denied its troops entered Ukraine and said they’re only deployed to patrol its side of the frontier, the European Commission has not said Russia has crossed the order. Russian trucks that Moscow says is carrying humanitarian aid have arrived at Ukraine's border, the country's border police were awaiting the necessary paperwork to begin inspecting them. EU ministers gathered for an emergency meeting to discuss developments in Ukraine, Iraq and Gaza.
Yesterday Obama said there is no need to send in advisors in Iraq as those that were stranded on the mountain are already off it; meanwhile most international humanitarian groups saying the situation is far from stable. Iraq's prime minister Maliki relinquished power, ending eight years of tumultuous rule; he ignored Sunnis when forming the current government and set up the present revolution. Israel and Hamas still have a cease fire in place. Geo-political events are still with us, but for the moment traders are turning to the weakness in the US and EU economies.
July industrial production was up 0.4%, slightly better than 0.3% expected, manufacturing increased 1.0% against forecasts of +0.5%; the fastest pace in five months as capital spending climbed and motor vehicle demand increased. Capacity utilization, which measures the amount of a plant that is in use, rose to 79.2% in July from 79.1%, in line with estimates.
At 9:30 the DJIA opened +40, NASDAQ +26, S&P +6; 10 yr 2.39%-1 bp, 30 yr MBS prices +5 bp frm yesterday’s close.
More not-so-good news at 9:55; the mid-month U. of Michigan consumer sentiment index widely expected at 82.3 frm June’s final read of 81.8 declined to 79.2 the lowest reading since last November. The 10 yr yield declined to 2.37% on another soft data point, not much change in the stock market though.
Interest rates continue to decline, we expect the 10 yr has an opening to fall to 2.25% on this move. MBS rates will follow but not at the same pace as treasuries. The move lower may be choppy with the level of rates so low. One factor for US debt is how low Germany’s 10 yr bund will fall; at 1.007% the US 10 yr looks like a good buy for investors. Two drivers for lower rates; the weakness in Europe’s economies and the geo-political issues; Ukraine is the front runner at the moment. Technicals are positive as more investors fading the idea the economy is improving and central banks unwilling to increase rates. The Fed is now trapped, it can’t increase rates because most Fed officials including Yellen are afraid by doing so will send the US recovery off track. Housing is still struggling and consumers are showing reluctance to spend as evidenced by July retail sales.
PRICES @ 10:15 AM
10 yr note: +6/32 (18 bp) 2.38% -2 bp
5 yr note: +1/32 (3 bp) 1.57% -1 bp
2 Yr note: -1/32 (3 bp) 0.43% +1 bp
30 yr bond: +21/32 (66 bp) 3.16% -3 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: @9:30 102.69 +5 bp (+7 bp frm 9:30 yesterday) 4.0 coupon 105.75 +5 bp (+7 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Sept: @9:30 103.51 +2 bp (-2 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Aug: @9:30 104.12 +5 bp (+8 bp frm 9:30 yesterday) 4.0 coupon 106.64 +5 bp (+6 bp frm 9:30 yesterday)
Dollar/Yen: 102.63 +0.18 yen
Dollar/Euro: $1.3393 +$0.0028
Gold: $1296.00 -$19.70
Crude Oil: $95.98 +$0.40
DJIA: 16,760.23 +46.65
NASDAQ: 4478.61 +25.61
S&P 500: 1962.83 +7.65