At 8:30 Sept housing starts and permits, the only scheduled data today, were better than expected on starts and worse than expected on permits. Housing starts rose to a 610,000 annual rate, the most since April and up 0.3% from a revised 608,000 rate in August that was higher than previously estimated, Commerce Department figures showed.  Building permits dropped to the lowest level in more than a year, reflecting a plunge in multifamily units that are often volatile. Building permits, a proxy for future construction, decreased 5.6% to a 539,000 annual rate in September, the lowest level since April 2009. They were projected to be little changed at 575,000, according to the median estimate in the survey. Applications for multifamily units dropped 20%, while those for single-family homes climbed 0.5%. Starts were up 4.1% in September from the same month last year, while permits decreased 11%. Construction began on single-family houses at a 452,000 annual pace, up 4.4% from August and the most since May.

 

Treasuries and mortgages are lower in price this morning as are the key stock indexes. The starts being higher didn't add much to the price declines in treasuries but did push the stock indexes lower than they were pre 8:30. Stock indexes care only about the trade in the dollar these days and this morning the dollar is a little better sending oil lower, gold lower and the equity market lower. 

 

Both interest rates and the stock market are under pressure this morning, driven by the dollar trading higher. The dollar is doing a lot better this morning against the euro currency and the yen. The dollar advanced versus all of its major counterparts including the euro as China’s unexpected increase in interest rates discouraged demand for assets related to economic growth. As long as the dollar falls against the key currencies US financials won't fare well as is evidenced in the very weak open this morning in the stock market; also hurting this morning weaker earnings and guidance from IBM and Apple. At 9:30 the DJIA opened -122, the 10 yr note at 9:30 -7/32 to 2.54% +3 bp and mortgage prices off 4/32 (.12 bp) on 30 yr fixed prices. The dollar advanced versus all of its major counterparts including the euro as China’s unexpected increase in interest rates discouraged demand for assets related to economic growth.

 

Dennis Lockhart, Atl Fed Pres was on CNBC cheering on the coming quantative easing that is a lock (no pun) to come on Nov 3rd. Still however, no real consensus as to how much the Fed will buy, and when the Fed will buy treasuries. The likely course is the Fed will buy longer dated treasuries (5s thru 30s) to drive long rates lower, but we question how much lower rates will fall. At some level no matter what the Fed is doing investors will not want to keep buying even with the Fed buying. If all the optimism about the benefits of another easing comes to pass, interest rates will begin to climb, not fall. What the Fed wants is an increase in inflation levels, that is anathema to fixed income investors. With equity markets rallying (assuming the easing does its intended job) investors will move out of treasuries and other long term fixed income investments (mortgages included) and more into equities. It all depends on the belief that QE 2 will meet its goal; something we still are not sure about.

 

NY Fed Pres Dudley is out with comments on the banks' problems; the Fed is paying attention to the potential impact on banks. BofA is out with comments it will re-start foreclosures within a couple of weeks and is assuring that its problems are being brought under control. BofA has made a deal with an insurer to cover any foreclosures that are challenged and are rescinded. Dudley said it is hard to tell how much more consumer deleveraging has to run. He cites sluggish consumer spending and the housing sector as huge hurdles to recovery; something we have been saying for months now. He is expecting an increase in re-financings as rates decline; that is likely if rates in fact decline from these levels, but as noted above lower long term rates remains a question in our view. If QE 2 does achieve its stated goals interest rates will not stay low for long.

 


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