Costa Mesa, CA
Treasuries and MBSs started a little better this morning on news that the EU will begin increased sanctions against Russia and the US is expected to announce more sanctions. That in and of itself is only part of the story. News from Ukraine is that Ukraine forces are closing in on two of the last strongholds the separatists hold as fighting is increasing. Mix in the Israeli/Hamas escalation along with most of the mid-east and now in Libya; the world has a lot of regional turmoil, each on its own is seen as a regional issue, but when stepping back looking at the larger picture investors, while not running head-long into safe treasuries are equally not backing off. In Germany it’s 10 yr bund rate is making another new low (the lowest since the late 1800s), trading at 1.15% compared to the US 10 at 2.46% this morning, 131 bps higher than the bund. US treasuries are still a good buy compared to other sovereign debt levels.
The May Case/Shiller 20 city home price index out at 9:00 was another weak housing release. Yr/yr prices up 9.3%, the slowest pace in more than a year as a lull in the U.S. housing market limits appreciation; in April yr/yr prices were up 10.8%. Month to month (April to May) prices declined 0.3%. Unrealistic lending requirements that were instigated by Dodd/Frank, the worst piece of legislation in many years, essentially took first time buyers and threw them under the bus. Also, with the horror stories of the collapse in home prices still linger in the minds of people and is some of a disincentive for would-be buyers. Property prices fell in 14 of 20 U.S. metropolitan areas in May from a month earlier after adjusting for seasonal variations.
The DJIA opened +31 at 9:30, NASDAQ +12 S&P +3; 10 yr note 2.46% trying once again to crack the 2.44%. 30 yr MBS prices +9 bps from yesterday’s close. This afternoon at 1:00 pm Treasury will sell $29B of 2 yr notes, this morning the 2 yr note is trading at 0.54% +4 bp; the 30 yr treasury is at 14 month lows.
July consumer confidence index was widely expected at 85.5 from 86.4 (revised from 85.2) in June. The index jumped to 90.9, the highest level in almost seven years (Oct 2007). The Conference Board’s gauge of present conditions rose to 88.3 from 86.3 in June. The barometer of consumer expectations for the next six months increased to 92.7, the highest since February 2011, from 86.4 a month earlier. The share of Americans who said jobs were currently plentiful advanced to 15.9 percent in July, the highest since May 2008, from 14.6 percent. Consumers said they expected greater employment opportunities in the six months ahead. The reaction took interest rate up a little and dropped MBS prices 5bps from 9:30 levels.
The FOMC begins today and will conclude tomorrow at 2:00 with the usual policy statement. The Fed will announce another $10B reduction in its monthly purchases, Yellen has made it clear in her recent comments that the Fed will conclude the monthly buying of MBSs and treasuries at the FOMC meeting in October. What if anything will change in the policy statement is focus now. How will the group paint the economy now and in the futures, and any definitive comments about the attitude toward increasing interest rates?
Rates better this morning but the bellwether 10 yr is still in its 5 bp range, at 2.46% with solid resistance at 2.44% and support at 2.50%; it has been in that range now for two weeks, unable to breakout in either direction. Technicals still slightly bullish and will remain that way unless the 10 closes above 2.52%, the support level is declining each day, a week ago our support level was 2.57%. 30 yr MBS prices are stuck in a 30 bp price range. Not expecting anymore improvement today ahead of FOMC tomorrow.