Treasuries headed for the biggest advance in 11 weeks after President Barack Obama won re- election. U.S. equity-index futures declined, erasing earlier gains and gold climbed for a third day. At 8:30 the DJIA futures traded at -123, yesterday the DJIA closed +133.
 
Treasuries and MBSs are rallying strongly this morning on the results of the election based on the view that the Fed will continue easing whereas if Romney had won he was thought to be ready to end the monetary stimulus, at least at the magnitude is now. He said he would not re-appoint Ben Bernanke when his term ends early 2014. In that regard Bernanke will not likely seek another term even with President Obama winning the election. Nevertheless this morning traders and investors are betting on weaker growth and more Fed stimulus. So far the Fed has helped keep the U.S. economy growing by purchasing $2.3 trillion of Treasuries and mortgage-related bonds and instituting a plan to buy $40 billion of home-loan securities a month. Romney talked about increasing taxes, that didn’t go down well, while Obama must deal with the “cliff” coming he is seen as less cuts and less tax increases than Romney. President Obama got 303 electoral votes compared to 206 for Romney (Florida still hasn’t yet been decided),  but Republicans held the House while Democrats remained in control of the Senate. In that respect nothing is different now than prior to the election. 
 
According to Bloomberg data, since Lyndon Johnson defeated Barry Goldwater back in 1964, when a Democrat has won the White House the 10 yr note yield has fallen 40 basis points in the following month, while when a Republican wins the note yield increased by 19 basis points. If that holds this time the 10 yr note would test the low yield set back in July at 1.40%. Whether or not that will occur again is questionable but the decline in the 10 yr note rate this morning is adding additional bullish technical bias.
 
The impact on markets from the election results are not likely to be well defined for a few days or more. Nothing has changed in terms of the make-up of the White House, the House or the Senate. Looking beyond the election Europe is climbing back into focus. The European Commission today cut its growth forecast for the euro zone. The 17-nation euro economy will expand 0.1% in 2013, down from a May forecast of 1.0%. It cut the forecast for Germany, Europe’s largest economy, to 0.8% from 1.7%. Europe’s economies are declining leading to slower growth in the US. Retail sales decreased more than economists estimated, a report showed today. Sales fell 0.2% from August, when they rose 0.2%, the European Union’s statistics office in Luxembourg said. Economists had forecast a decline of 0.1%. German stocks fell, erasing yesterday’s gains, as the European Commission cut its growth forecast. Greek lawmakers vote today on an austerity bill that contains austerity measures demanded by the so-called troika that oversees euro-area bailouts insists. A 31.5 billion-euro ($40B) aid payment has been frozen since June.
 
At 9:30 the DJIA opened -143, NASDAQ-39, S&P -15. The 10 yr note yield 1.64% -11 bp; 30 yr MBS price +79 bp frm yesterday’s close. 
 
This afternoon at 1:00 Treasury will auction $24B of 10 yr notes; yesterday’s 3 yr auction was on the weak side in terms of demand. At 3:00 Sept consumer credit is expected +$10.0B.
 
Let’s give this a few days for markets to settle down. Today and yesterday have been quite volatile, the implications of volatility is uncertainty; look for more of it today and over the next week or so. That said, the election and the renewed interest in the EU debt mess are combining to drive interest rates down. Some are now outwardly calling for the 10 yr note to fall to 1.40%, the low last July, and possibly below it. We still don’t agree with that, but we have to respect the action and this morning it looks quite bullish at the moment. The 10 yr this morning is 25 bp frm the July low, not an insurmountable task but to get there the economic outlook has to weaken for the US and Europe, and the Fed has to add more stimulus---both possible but at this point we don’t agree.

 
 

The final week of May is a big one for the real estate market as housing data dominates the headlines for the next three days. Tuesday sees the Case Shiller report on home prices for March as well as the first quarter; on Wednesday markets will receive the latest data on Existing Home Sales; and on Thursday April’s New Home Sales release is published. Overall, the reports are likely to show the recession slowing down but signs of full stabilization are still in the distance.

This week should also show consumer confidence slowly climbing from historical lows with the release of the Conference Board’s monthly survey on Tuesday and the revised survey from Reuters and the University of Michigan on Friday. In other macroeconomic data, April’s New Orders survey will be published Thursday, and the first revisions to the Q1 GDP release come out Friday.

Before the opening bell on Tuesday, market headlines are highlighting the impact of North Korea’s action over the weekend. Kim Jong Il’s regime tested a nuclear bomb on Monday, and the following day continued the testing with two more missiles, causing stocks across Europe and Asia to fall. e

U.S. markets may be heading in a similar direction on Tuesday, as index futures each point downwards. S&P 500 futures have lost 2.8 points to 882.1,  Dow futures dropped 40 points to 8220, and Nasdaq futures have slipped 10.75 points to 1350. Meanwhile, the U.S. dollar has been moving higher as equities slip.


Further Details:

At 10am, Consumer Confidence is expected to see a small gain in the Conference Board’s monthly index. April’s reading was 39.2; this month’s consensus is 42.6. 

The optimistic expectation is based on similar reports that have shown recent improvement, but the labor focus in the report could put a damper on any improvement, as more people than ever before continue to receive unemployment benefits. In addition, rising gas prices could hurt the present situation index.

Analysts at IHS Global Insight warn that a gain confidence might not translate into higher consumer sales, as is usually the case, as there’s been a broad shift towards increased savings. 

“This slight improvement will have little impact on spending behavior, which remains cautious,” they said. “Rising unemployment, tight credit conditions, and depleted household wealth continue to restrain spending, offsetting the benefits of fiscal stimulus and lower energy prices.”

Beginning the week at 9am, the Case Shiller index for March is expected to show house prices have fallen 18.40% compared to 12 months prior. That’s a dramatic loss, but the February report posted a -18.63% fall, so the deflation is actually slowing. 

Case Shiller will also posts results for the entire first quarter, which takes into account nationwide prices, whereas the monthly index look only at 20 metropolitan areas. Prices in Q1 are expected to have dropped 18.7%, a worse reading than the -18.2% print from Q4 2008.


On Wednesday, Existing Home Sales are set to see a minor gain, following a 3.0% fall in March. The consensus view among economists is to see an annualized pace of 4.67 million sales in April, up from 4.57 million in the March report.

“Home affordability has certainly helped drive buyers back into the market, especially those searching for existing homes where prices have fallen the most due to foreclosures,” said BTMU’s Ellen Zentner several days before the release. “Nevertheless, affordability is at an all-time high, mortgage rates are very low, and the government’s $8,000 first-time home buyer tax credit is hard to ignore.” 

Not everyone is optimistic about the report, however. Analysts from IHS Global Insight said existing sales are driven by distressed sales versus weak demand, and in April “weak demand will win this tug-of-war, resulting in another drop in existing home sales.” They forecast a figure of 4.47 million sales.

On Thursday, the 8:30am release of New Orders is anticipated to show no change from the prior month, though expectations differ widely. Some analysts look for 2% decrease in the month while others look for a 2% gain.

Defense orders are expected to have a positive impact in the report, as are motor vehicles, but generally output is struggling across the board.  

As with every Thursday, Jobless Claims will also be released at 8:30. Initial claims have been north of 600,000 for 15 weeks now, and continuing claims continue to break ceilings. Last week’s survey, which garnered extra attention because it was the surevy week for Nonfarm Payrolls,  showed 631,000 new claims.

At 10 am, New Home Sales couldshow signs of stabilization in the housing market. Analysts look for a slight uptick in the seasonally-adjusted annual pace to 360,000 sales, up from 356k in March.

“Single-family housing starts and permits and builder confidence have improved since January, and were all up in April,” commented Brian Bethune and Nigel Gault from IHS Global Insight. “Stronger demand (i.e. new home sales) probably accounts for these recent improvements, and we project that new home sales increased to 368,000 units (annualized) in April.”

To end the week, Friday posts the first revisions to Q1 GDP at 8:30, which originally came in at -6.1%. Economists look for an upward revision to -5.5%, as new data on inventories  suggests a less steep decline than firth thought. The uptick has a downside though: that inventory has to be worked off in the present quarter instead.

At 10 am, markets will receive revisions to the Consumer Sentiment survey compiled by Reuters and the University of Michigan.  Analysts look for little change from the preliminary reading of 67.9.