Rate Snapshot: When will the Fed begin increasing rates?

by MPA15 Dec 2014

By David Shirmeyer, CEO at Sigma Research

After a 678 point decline in the DJIA, the 10 yr note falling 23 bps and MBS prices 92 bps higher last week, this morning the stock indexes are better and the 10 yr note yield higher. Not surprising, it was expected after those kinds of moves last week and ahead of the FOMC meeting that begins tomorrow and ends Wednesday afternoon with Yellen’s press conference. Last week the 10 ended at 2.08%, at 9:00 this morning 2.11%; 30 yr MBS prices -20 bps. Crude oil in early trading +$0.27.


Four reports this morning. The Dec NY Empire State manufacturing index fell to -3.58 against forecasts of 12.0. Nov industrial production expected up 0.7%, increased 1.3%, the most since May 2010. Nov capacity utilization expected at 79.3% jumped to 80.1% and Oct revised to 79.3% frm 78.9%. The Dec NAHB housing market index 57 frm 58.


Another Bloomberg survey; 90% of those responding to the question about the ECB’s ability to launch large scale buying of government bonds believe the ECB will actually do it; last month the same question got just 57% that believed the ECB would be able to do it in the face of Germany’s resistance against sovereign-bond purchases, saying they undermine the incentive for governments to make structural adjustments. The ECB’s next meeting is six weeks off so this survey may change dramatically before the meeting actually occurs. Europe teetering on deflation with oil prices declining and very soft economies has to do something but one serious problem with the EU is 18 nations looking out for themselves. Nov inflation in the EU 0.3%.


The DJIA opened +105 at 9:30, NASDAQ +26, S&P +12; 10 yr 2.13% +5 bps and 30 yr MBS price -20 bps frm Friday’s close.


This week is all about the FOMC policy statement and how the phrasing of the statement will be translated about when the Fed is going to begin increasing interest rates. More than likely the statement will change the previous phrasing but it will still leave investors and traders debating when the Fed will start. The economic performance in the US will dictate when no matter the new wording markets are looking for.


NAHB just released its housing market index, expected at 59 frm 58, the index . Home builders appear to be more optimistic than the reality in the housing sector; as the WSJ said in an article today; builders are smiling like the boom in 2005 but are building at 2008 levels. In recent years, builder confidence has appeared detached from the actual construction of houses. The index is based on survey responses from about 400 members, who are asked about sales, expected sales and traffic from prospective buyers for newly built single-family homes. The index declined to 58 frm 59; current conditions down 1 point, future outlook down 1 point, buyer traffic unchanged. Overall a soft report.


Technicals still bullish for the interest rate outlook with China, Europe, India, and Japan and other emerging markets are slowing and crude oil and all commodities declining on lower demand as global economies fail  to gain any traction. We noted last week we expected an increase in market volatility, we see that today with stocks better to start and the bond and MBS markets weaker. Last week’s huge moves in al US financial markets was, in terms of time and price, somewhat overdone; this week it’s the FOMC meeting on Wednesday that is the focus, crude oil price also a factor. Crude fell $8.00 last week and has been free-falling for a month now; it too is likely to settle this week before declining further. Is it more supply or weak demand, or both; we believe it is both but the price will continue to decline to at least $50.00/barrel.


This Week’s Economic Data:


              8:30 am Dec Empire State Manufacturing index (12.0 frm 10.6); as reported -3.58

              9:15 am Nov Industrial Production (+0.7%); as reported +1.3%

                           Nov Capacity Utilization (79.4%); as reported 80.1% frm 79.3% in October, Oct originally reported 78.9%

             10:00 am Dec NAHB housing market index (59 frm 58); as reported 57.


              8:30 am Nov housing starts and permits (starts +2.8%, 1038K; permits -1.8%, 1060K)

              10:00 am FOMC meeting begins


              7:00 am weekly MBA mortgage applications

              8:30 am Nov CPI (-0.1% overall, ex food and energy +0.1%)

                           Current account balance (-$96.3B)

              2:00 pm FOMC policy statement

              2:30 pm Janet Yellen press conference


              8:30 am weekly jobless claims (295K +1K)

             10:00 am Dec Philadelphia Fed business index (25.0 frm 40.8 in Nov)

                           Nov leading economic indicators (+0.6%)


PRICES @ 10:15 AM

10 yr note:                  -10/32 (31 bp) 2.12% +4 bp

5 yr note:                    -8/32 (25 bp) 1.56% +5 bp

2 Yr note:                    -2/32 (6 bp) 0.57% +3 bp

30 yr bond:                  -15/32 (47 bp) 2.76% +3 bp

Libor Rates:                1 mo 0.160%; 3 mo 0.240%; 6 mo 0.338%; 1 yr 0.600%

30 yr FNMA 3.5 Jan:   @9:30 104.14 -20 bp (-17 bp frm 9:30 Friday)

15 yr FNMA 3.0:         @9:30 103.89 -33 bp (-16 bp frm 9:30 Friday)

30 yr GNMA 3.5 Jan:  @9:30 104.92 -28 bp (--5 bp frm 9:30 Friday)

Dollar/Yen:                 118.57 -0.18 yen

Dollar/Euro:               $1.2432 -$0.0030

Gold:                          $1210.10 -$12.40

Crude Oil:                  $75.68 -$0.13

DJIA:                         17,327.48 +46.65

NASDAQ:                   4662.67 +9.08

S&P 500:                    2009.68 +7.35