Treasuries and mortgage markets opened soft this morning on better economic data from England. The U.K. economy grew more than forecast in the third quarter and Standard & Poor’s said the nation no longer faces the risk of downgrade as pressure eases on the Bank of England to add more stimulus.  The U.K. gross domestic product rose 0.8% in the quarter through September after climbing 1.2% in the previous three months, the Office for National Statistics said in a separate report in London. The U.K. also has the top credit grades at Moody’s Investors Service and Fitch Ratings, both with a stable outlook. S&P had previously said that Britain faced a one-in-three chance of a downgrade because of its ballooning debt. The Brits are biting the bullet with huge spending cuts while here in the US we can't stop spending as the government grows like a dandelion in July.

 

At 9:00 the Case/Shiller home price index, expected up 0.2% took another dip, down 0.2%. The decline in prices may be the precursor for another run on home prices and isn't what anyone wanted to see. There was little reaction to the report as both treasuries and mortgages were already trading lower. The stock indexes were weaker and lost a few more points on the data.

 

At 9:30 the DJIA opened -56, the 10 yr note -12/32 at 2.61% above its recent high yield; mortgage prices at 9:30 -9/32 (.28 bp) frm yesterday's close on 30s, 15s -5/32 (.15 bp).

 

At 10:00 the Conference Board reported Oct consumer confidence up 50.2 frm a slightly revised 48.6 (frm 48.5).

 

Also at 10:00 the FHFA reported its home price index for Aug; up 0.4%, better than expected.

 

The Richmond Fed manufacturing index also came in better, at +5 frm -2.0 in Sept.

 

The three data points at 10:00, all better than forecasts but there has been no immediate reaction to the data in the bond market. The stock indexes however did improve but still lower on the day at 10:05.

 

Now the auctions for the week; at 1:00 Treasury will auction $35B of 2 yr notes. The demand should be good, banks like the 2 yr. Two weeks ago Treasury auctioned 3 yr, 10 yr and 30 yr notes and bonds, the demand was weak so this go-round bidders are hedging their bets by selling treasuries and also pushing mortgage prices lower.

 

Markets still consumed with next week's QE from the Fed; we will get the easing but the details remain cloudy with estimates all over. If there is a consensus it is that the Fed will announce it will purchase $500B of longer dated treasuries over a six month timeframe. The idea, to push rates lower and generate more consumer spending. Will it really? Hard to handicap how lower rates will motivate consumers, but we don't expect as much benefit as many do. Keeping interest rates low won't be easy and likely won't last long if consumer spending and the housing sector show any life as a result of the easing move.

 


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