After 5 days of selling in the rate markets, this morning a little improvement. Prior to 8:30 the 10 yr note held a 12/32 price gain and mortgages up 7/32 (.22 bp); at 8:30 weekly jobless claims were better halting any additional improvement. Claims for last week were expected to be up 3K to 455K, as reported claims fell 21K to 434K, the lowest in weeks. Continuing claims fell to 4.35. mil frm 4.80 mil last week. Treasuries and mortgages dropped back a touch but still managing to hold a little improvement. At 9:00 the 10 yr note +7/32 at 2.71% -2 bp and mortgages +5/32 (.15 bp) frm yesterday's close. Not much, but any gain is welcome after the bond market flipped on the QE outlook.
When the FOMC announced the Fed was prepared to ease further at the conclusion of the 9/21 meeting it set off a huge run lower in rates on the belief the Fed was intent on driving long term rates lower. The 10 yr note yield fell 45 basis points and mortgage rates declined 24 basis points. The dollar declined and the equity markets rallied. Recently though the outlook for a strong easing move from the Fed has faded and the rate markets are now back to levels prior to the FOMC meeting. The read on the easing initially was that the Fed would buy significant amounts of treasuries to drive long term rates lower, bust the dollar and ignite more interest in the housing sector. Over the last 10 days the sentiment has changed; presently the consensus is that the Fed will launch an easing move but that it will be at a slower pace than the initial expectations.
The stock market opened better this morning on the weak dollar; after a couple of days of improvement the dollar is under pressure again today. China’s yuan fell to its weakest level this month after the central bank set a lower reference rate for a third day, spurring speculation the government is limiting appreciation. The People’s Bank of China set the reference rate 0.11% weaker at 6.6986 against the greenback. The yuan has weakened 0.5% since policy makers from the Group of 20 nations said on Oct. 23 they would refrain from “competitive devaluation” before the Nov. 11-12 leaders’ summit. The Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners, declined 0.6% to 77.698. The gauge has fluctuated between gains and losses this month as speculation additional credit-easing measures from the Fed will weaken the currency were offset by bets the central bank will buy a smaller amount of bonds than some analysts predicted.
At 1:00 Treasury will auction $29B of 7 yr notes; yesterday's 5 yr note was met with OK demand but not nearly as strong as past auctions. The 7 yr today will be more difficult to get strong demand.
The Fed is about to turn on the printing press to print more dollars. That is what QE is all about. The Fed however talks about helping revive the economy with the easing while the real emphasis is to drive down the dollar to improve exports and improve the economy. Lower interest rates, while helping, is only a method to beat down the dollar. The problem is however, that every country is trying to do the same. With the Fed about to "ease", the effect will be that other central banks will be forced to do the same. The recent jump back in rates has likely run its course but we are left with the question, how much lower will rates fall when the Fed actually announces its easing policy, and will the Fed lay out the entire plan being formulated? Flying blind, throwing it against the wall to seer what sticks. Unemployment isn't going to fall much, consumers still deleveraging and the housing sector shows no real signs of stabilizing. Lower interest rates are just a by-product of the Fed printing more money to bring the dollar down.
-thinkbigworksmall.com
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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.
Treasuries and mortgages opened firm this morning ahead of the Sept existing home sales at 10:00. The dollar is being hit again this morning, adding support to the stock indexes and the bond market; the finance ministers finished their meeting in South Korea with a statement that MAYBE the G-20 will think about adopting a plan to make currencies more attuned to markets and the economy rather than moving closer to a currency war that has been brewing for months; the dollar this morning is pushing into lows against the yen not seen in years. European stocks climbed after Group of 20 finance chiefs heightened speculation the Federal Reserve will announce further stimulus measures next week.
Ben Bernanke spoke early this morning (8:30) saying the central bank and other regulators are “intensively” examining financial firms’ home-foreclosure practices and expect preliminary findings next month. “We have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions,” ...... “We are looking intensively at the firms’ policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures.” He didn’t comment on the outlook for the economy or monetary policy, eight days before the Fed meets to decide on what economists and investors expect will be a plan to boost growth by restarting large-scale securities purchases. After discussing foreclosures, he devoted much of his remarks to the Fed’s housing-market efforts, such as studies, conferences and events serving troubled borrowers.
The DJIA opened +50; 10 yr at 9:30 +14/32 2.51% -6 bp and mortgage prices +7/32 (.22 bp) on 30s and +5/32 (.15 bp) on 15s.
At 10:00, the only data today, Sept existing home sales, expected up 2.9%, increased 10.0% to 4.53 mil annualized. A big jump but not what the headlines would suggest; most closings were part of the tax credit, 35% of the sales were distressed sales and now with the foreclosure issues sales in Oct won't do so well. The median home price $171,700.00 with a 10.7 month supply on the markets, inventory levels did decline 1.9% but still leaves a huge overhang, especially when the foreclosure moratorium ends. There was no reaction to the better report in the bond or mortgage markets on the report.
This Week's Economic calendar:
Tuesday;
9:00 am Case/Shiller 20 city home price index (+2.0%, August +3.18%)
10:00 Oct consumer confidence index (49.0 frm 48.5)
1:00 pm $35B 2 yr note auction
Wednesday;
7:00 am Weekly MBA mortgage applications
8:30 am Sept durable goods orders (+1.7%; ex transportation orders +0.1%)
10:00 am Sept new home sales (+2.4% to 295K units annualized)
1:00 pm $35B 5 yr note auction
Thursday;
8:30 weekly jobless claims (+3K to 455K)
1:00 pm $29B 7 yr note auction
Friday;
8:30 am Q3 advance GDP (+2.0% frm +1.7% in Q2)
Q3 employment cost index (+0.5%)
9:45 am Oct Chicago purchasing mgrs index (57.5 frm 60.4)
9:55 am U. of Michigan consumer sentiment index (68.0 frm 67.9)
Interest rate markets are likely to continue their narrow trendless range through the week ahead of the QE and elections next week. Over the past two weeks mortgage prices and mortgage rates have been generally flat with prices moving in a very narrow range. The Fed will step up and announce large scale buying of treasuries when the FOMC meeting concludes on Nov 3rd, in the meantime the Nov 2nd elections, while generally conceded to Republicans, is still a soft point for markets; the margins of victories and the number of them will be closely monitored as a measure of consumer discontent that has increased dramatically over the past 9 months. The health care bill a true mess, and government spending have consumers increasingly nervous over the economic outlook. Can the new make up of the House and Senate change the underlying fears of consumers? Will Pres Obama stand strong and use his veto powers to hold health care as it is currently written or will he concede the bill is flawed and work to fix it? These and other key questions will dominate through the remainder of the year.
- www.tbwsratealert.com
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.
Teasuries and mortgages opened a little lower in price this morning. At 8:30 three economic reports somewhat confused traders; weekly jobless claims were expected to be down 2K but actually increased 13K to 463K with last week's claims revised from 445K to 449K. Continuing claims however did fall to 4.40 mil frm 4.51 mil in the previous week, declining continuing claims suggests many are now losing their unemployment benefits.
Also at 8:30 Sept PPI was expected to be up 0.2%, it jumped 0.4% for the overall but when food and energy are extracted up just 0.1%. The overall increase is the second in a row that increased 0.4%. An increasing debate is brewing around whether excluding food and energy is distorting inflation readings and should be ignored in favor of the overall inflation readings.
Finally at 8:30, the August trade balance, expected at $-44.5B, was $-46.3B. Of the three data points at 8:30 the trade deficit is the least concern.
The US dollar continues to weaken, lower again this morning against the euro and most other key currencies. It is a developing currency war between countries trying to beat down the value of their currency to increase exports and increase economic recovery. So far, based on today's August trade deficit it hasn't yet worked. The August deficit at $46.3B is evidence the US is importing more than exporting. Many believe one of the key thoughts at the Fed on QE 2 is a move to further lower the value of the dollar. There is some encouraging news out of China that it may be ready to let its yuan appreciate, the US has been pushing China to let its currency increase to level the playing field on exports and import prices. Overnight Singapore moved to increase its currency by widening its trading band, suggesting the beginning of China and US compromise on the currency battle that some worry may start a trade war.
The foreclosure mess that is boiling may have serious consequences for the recovery of the housing markets. New estimates from RealtyTrac that if foreclosures are halted for three months it would push the housing market recovery out another two to three quarters into 2014. One third of all sales have been distressed sales on foreclosures, that market is in jeopardy as states are evaluating their foreclosure laws and whether lenders have violated them; in the meantime investors and home buyers that have been buying up foreclosed properties are on hold until clarity on the validity of the titles can be certain. Top legal officers of all 50 states opened a joint investigation into home foreclosures, saying they will probe practices at banks and mortgage companies. The states will conduct a coordinated inquiry into whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures, Minnesota Attorney General Lori Swanson said yesterday in a statement. At Chase, CEO Jamie Dimon said he is sure Chase did not seize any properties illegally and that the costs of reviewing 115K files would be "incremental".
At 9:30 the DJIA opened -3, the 10 yr note -4/32 and mortgage prices at 9:30 off .06 bp.
Treasury will completes this week's borrowing at 1:00 this afternoon with $13B of 30 yr bonds. The 3 yr and 120 yr note auctions were somewhat disappointing but still saw good bidding. Today's 30 yr is hard to handicap; the 30 recently has been moving erratically compared with other treasury coupons.
Treasuries and mortgages started generally unchanged this morning; at 8:30 weekly jobless claims were reported better than expectations, down 11K to 445K. Last week's claims were revised a little higher, from 453K to 456K; continuing claims continue to decline, 4.462 mil frm 4.51 mil the previous week. Continuing claims are slowly declining as unemployed run out of benefits. The reaction to the claims data helped the stock indexes improve, the rate markets didn't have much reaction. The claims data this morning have no impact on the outlook for tomorrow's BLS employment data as the data was completed prior to the claims this week. The claims were the lowest since July 10th, but still anemic and isn't good enough to stimulate economic outlooks.
The Bank of England left its emergency stimulus unchanged this morning at 200 billion pounds ($319.36 billion) as widely expected and left its base rate unchanged at 0.5%. Manufacturing rose more than economists forecast in August in a sign that the recovery in factory production is gaining traction. Output increased 0.3% from the previous month, when it gained a revised 0.4%, the Office for National Statistics said today in London; estimates were for an increase of 0.2%. Nothing from the BofE on more easing as is the case in the US and Japan so far. European Central Bank President Jean- Claude Trichet said interest rates in the 16-nation euro region are “appropriate,” indicating he sees no immediate need to join a global push to ease monetary policy.
Industrial production in Germany jumped 1.7% from July, when it rose 0.1%, the German government reported today. Economists had forecast a gain of 0.5%. From a year earlier production increased 10.7% when adjusted for the number of work days after rising 10.9% in July. Looking forward, Germany could slip back with the 17% increase in the euro currency that may cut their exports some.
Not much more to deal with today; tomorrow's Sept employment report is looming tomorrow morning and is all that is on the minds of traders today. Current estimates are for overall non-farm payrolls to decline 8K with private job growth up 85K and the unemployment rates at 9.7% +0.1% frm August. Nonfarm payroll employment in August slipped 54,000 after falling a revised 54,000 in July. A big part of the weakness was seen in the government sector, which still included layoffs of temporary Census workers. Government jobs dropped 121,000 after falling 161,000 in July. For the August drop, 114,000 were due to layoffs of temporary Census workers. In contrast, private nonfarm employment continued to rise, gaining 67,000 in August, following a revised boost of 107,000 the month before.
Looking for a quiet session in the bond and mortgage markets today; not sure what to expect from the equity markets that opened better at 9:30 this morning. At the open the DJIA +25, 10 yr note unchanged but mortgage prices better, up 6/32 (.18 bp) frm yesterday's closes.
Treasuries got a huge boost this morning on the ADP private jobs report for Sept. Markets were expecting ADP would report an increase of 20K to 25K ne jobs in the private sector, as reported jobs fell 39K. August jobs were however revised from -10K to +10K. ADP added more confusion top what Friday's official jobs report will be. The decline in jobs in Sept is the worst since January. Small businesses (less than 50) fell 14K, medium businesses (less than 400) fell 14K and large businesses lost 11K. Goods producing jobs were down 4K, service sector jobs +6K and manufacturing jobs down 17K. Not a good report no matter the argument that ADP doesn't do a good job trying to mimic the BLS data. The reaction sent the 10 yr note from +4/32 to +17/32 with its yield falling to a new low yield at 2.41%, the lowest by a fraction in this recent decline. Mortgage prices improved by 5/32 (.15 bp) on the reaction.
Stock indexes were trading better in line with Asian and European equities until the ADP report, then lost their gains. At 9:00 the DJIA trade was +3, the 10 yr +16/32 at 2.42% -6 bp and mortgage prices +6/32 (+.18 bp) frm yesterday's close. At 9:30 the DJIA opened -3, the 10 yr note at 2.39% -9 bp and mortgage prices +6/32 (+.18 bp).
Earlier this morning (7:00 am) the weekly MBA mortgage applications were better last week. The Market Composite Index, a measure of mortgage loan application volume, decreased 0.2% on a seasonally adjusted basis from one week earlier. The Refinance Index decreased 2.5% from the previous week. The seasonally adjusted Purchase Index increased 9.3% from one week earlier and is the highest Purchase Index observed in the survey since the week ending May 7, 2010; but was 34.7% lower than the same week one year ago. The four week moving average for the seasonally adjusted Market Index is down 3.0 percent. The four week moving average is up 2.0% for the seasonally adjusted Purchase Index, while this average is down 4.2% for the Refinance Index. The refinance share of mortgage activity decreased to 78.9% of total applications from 80.7% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 6.1% from 6.0% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.25% from 4.38%, with points decreasing to 1.00 from 1.01 (including the origination fee) for 80% loans. The 30-year contract rate is the lowest recorded in the survey, with the previous low being the rate observed last week. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.73% from 3.77%, with points increasing to 1.14 from 1.13 (including the origination fee) for 80% loans. The 15-year contract rate is the lowest recorded in the survey, while the previous low was observed last week.
Along with Friday's Sept employment report, markets are focused on the Fed doing another easing move; that view was fortified yesterday when Japan announced it would do its own QE. Japan will buy $60B of Japan bonds and it cut its base rate to zero from +0.1%. The global QE is spreading; expect QE from England, and other European countries in the days ahead. It is a run to drive currency values lower with the result of better export business. Every major economy is now in a run to beat their currency lower. We still don't see much coming from the easing other than some lower interest rates initially, but if the easing moves are successful in improving the economic outlook interest rates won't stay low for long and likely will spike higher in a rapid move. That said, the economic recovery will remain weak until consumer spending increases and there is strong improvement in the housing sector; employment increases will lag until the underlying fundamentals improve.
U.S. Treasury Secretary Timothy F. Geithner said countries that rely on exports for growth must change their policies or “global growth will slow and all of us will be worse off.” “It is very important to see more progress by the major emerging economies,” Geithner said today in text prepared for a speech at the Brookings Institution in Washington.
The bellwether 10 yr note is hitting stops this morning as it pushed into new low yields from last August. Mortgages are going along for the ride but have yet to break out into new high prices; still .28 basis points from testing the highs set on Sept 1st.
Yesterday the stock indexes were lower aiding the bond market, this morning in early trading activity the indexes were aiming toward a better open at 9:30. At 9:00 the DJIA +68, the 10 yr note +1/32 and mortgage prices +.03 bp) frm yesterday's close. At 9:30 the DJIA opened +83, 10 yr note +2/32 and mortgage prices +2/32 (.06 bp).
U.S. stock-index futures climbed as Japan pledged to buy 5 trillion yen ($60B) of assets and cut its benchmark interest rate to stimulate economic growth. The Bank of Japan pledged to expand its balance sheet in a bid to shore up the nation’s slowing economic recovery, and lowered the benchmark interest rate to a range of zero percent to 0.1% from the previous 0.1% target. The yen is losing a fraction on the news while the euro currency strengthens against the dollar. Japan is doing what the US is set to do, keep rates low and monetize some debt to keep the country from sliding. The move to lower its rates is the first since 2008.
Europe’s recovery is weakening as governments accelerate efforts to tackle their budget deficits and fix their banks just as the global economy weakens. Europe’s services and manufacturing industries grew at the slowest pace in seven months in September, adding to signs that the economy is weakening as governments implement austerity measures. The composite index of manufacturing and services fell to 54.1 in September from 56.2; like the US ISM data, a reading over 50 is considered expansion, under 50 contraction. Although the report was weak Europe's equity markets were better overnight.
The Johnson Redbook sales report showed an increase of 2.7% yr/yr. The ICSC-Goldman retail sales report showed an increase of 2.4% yr.yr and -0.8% week/week.
The data for the day hit at 10:00 with Sept ISM index expected at 51.8 frm 51.5; as reported the index jumped to 53.2. New orders component at 54.9 frm 52.4, employment index at 50.2 frm 48.2 and prices pd at 60.1 frm 60.3. A better report than expected sent the DJIA from +85 to +112 on the knee jerk, the 10 yr note frm +5/32 to unchanged and mortgage prices from +2/32 (.06 bp) with no initial change. Catch 22? If economic data improves what will the Fed do about easing? Likely it will take an unexpected big improvement in employment to shake the easing belief that is solidly embedded in markets.
Sept employment on Friday still has consensus with no change in total non-farm payroll jobs but +70K in private sector job growth. The government still cutting census jobs; the unemployment rate is expected up 0.1% to 9.7%. We expect the unemployment rate to increase in the months ahead if the economic recovery gains footing, millions have simply dropped out of the labor market, when they re-enter they will be considered unemployed. In the meantime many are living on 99 weeks of unemployment compensation.
Treasuries and mortgages opened better this morning; this is employment week with Sept employment data out on Friday. Almost as important, the QE 2 easing that the Fed is expected to launch when the FOMC meets on Nov 2 and 3. In the meantime a few key data points to deal with. Outside of Friday's employment report there are three data points we will be looking at closely; the ISM services sector index, weekly jobless claims and August consumer credit.
At 9:00 this morning the 10 yr note +4/32 at 2.2.50% -2 bp; mortgage prices +2/32 (.06 bp) and the DJIA futures -33. At 9:30 the DJIA opened -2; 10 yr note +4/32 and mortgages +2/32 (.06 bp).
Market overall consensus is that the Fed will start QE 2 at the beginning of next month. While that is the consensus, we are uncertain about how the bond and mortgage markets will take it; we are not as bullish about a big decline in rates. The bond market has already discounted a lot of the move an easing announcement would have; at best the 10 yr may fall another 15 to 20 basis points and mortgage rates down just 5 to 7 basis points from present levels. Not much bang for the buck. Treasuries were little changed Friday even though New York Fed President Wm. Dudley said the outlook for job growth and inflation is “unacceptable,” and that more monetary easing is probably needed to spur growth and avert deflation. We are left with the thought and question; will lower interest rate do anything to jump start economic growth? So far the current historic low rates have not fueled much recovery; housing is still soft (and that is a kind description), consumers are paying off bills, and businesses are not hiring; lower interest rates may not help much.
Based on what the Fed bought in 2009, yields are trading as if it has already acquired an additional $315B to $670B of securities, according to Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. Policy makers will announce plans buy $100B to $1T in Treasuries before the year is out, a survey of 12 of the 18 dealers show. Based on what happened when the Fed began purchasing $1.725T of government debt and mortgage securities in 2009, lower yields are not a foregone conclusion. Treasuries lost 3.72% last year as a drop in bond prices drove the yield on the 10-year note to 3.84% from 2.22%.
TARP ended at the end of Sept. One of the most controversial programs in decades. According to present estimates the cost to tax payers is between $50B and $100B; it will take a year or two for the final cost to be determined however. ON the margin, given the panic that ensued in 2008 the program was not that bad.
Two reports at 10:00 this morning; August factory orders, expected -0.4%, were -0.5% but July orders were revised to +0.5% frm +0.1%. August pending home sales, contracts signed but not closed were expected up 1.0% but jumped 4.3%, the third month in a row that sales were up; compared to August 2009 however, sales are still down 20% frm a year ago. No immediate reaction to the two reports.
This Week's Economic Calendar:
Tuesday;
10:00 am ISM Services Sector index (51.8 frm 51.5)
Wednesday;
7:00 am MBA mortgage applications (N/A)
8:15 am ADP employment est. for Sept (+18K new private sector jobs)
Thursday;
8:30 am weekly jobless claims (+2K to 455K)
3:00 pm Aug consumer credit (-$3.0B)
Friday;
8:30 am Sept employment data (private non-farm jobs +70K, overall non-farm jobs unchanged, unemployment rate 9.7% +0.1%)
10:00 am Aug wholesale inventories (+0.4%)
Financial markets are completely consumed with QE 2, more easing from the Fed. Listening to the multitudes of guests on CNBC one could expect all will be better with more easing from the Fed, there may be a lot of disappointment if it fails to do what most believe----increasing employment, increasing consumer spending and some kind of improvement in the depressed housing sector. We truly hope we are missing the point, but even 20 basis points lower in treasury rates and a few basis points lower in mortgage rates won't increase employment, consumer spending or increase home sales very much.
Treasuries and mortgages opened weaker this morning ahead of a flurry of economic data. First out of the gate; August personal income and spending at 8:30, income up 0.5% while spending was up 0.4% both generally in line with forecasts and didn't generate any movement in the markets. The stock index futures early on were pointing to a better open with the DJIA trading +54 points at 9:00 am.
Wm. Dudley a member of the FOMC was out speaking this morning and added more conviction that another QE is coming. Dudley, known as a dove on the FOMC, actually mentioned a number for the easing at $500B over a six month period. The Fed has been canvassing primary dealers on an easing move and CNBC has run its own poll of economists and dealers, according to the CNBC poll dealers are looking for what Dudley suggested, $500B. Not as much as markets were thinking so now we have QE Light. Dudley isn't Bernanke so his comments need to be taken with some grain of salt; however, the Feds likes to "leak" out what it is thinking at times to test the waters.
Taking it chronologically this morning; over night China’s manufacturing expanded at the fastest pace in four months in September, adding to signs that economic growth is stabilizing. The purchasing managers’ index rose to 53.8 from 51.7 in August, according to China’s logistics federation and statistics bureau, like the US manufacturing indexes, over 50 is expansion. At 9:00 the 10 yr note traded off 13/32 at 2.56% up 4 bp, mortgages -4/32 (.12 bp) and the DJIA +53 on the China news, Dudley's comments and the August income and spending. At 9:30 the 10 yr -14/32 2.56% +4 bp and mortgage prices -7/32 (.22 bp) on 30 yr FNMA's.
Next up this morning, at 9:55 the U. of Michigan consumer sentiment index was expected at 67.0 frm 66.6, as released sentiment increased to 68.2; the 12 month outlook on expectations at 61.0 frm 59.0. The initial reaction added a little to the DJIA but the bond and mortgage markets held steady. While a better index reading it is still on the historically low end. With the ISM hitting five minutes later markets were generally steady but weaker in rates and stronger in equities.
At 10:00, August construction spending, expected down 0.4%, was up 0.4%; July spending however was revised lower, from -1.0% to -1.4%.
Also at 10:00 the Sept ISM manufacturing index, expected at 54.5 frm 56.3, was right on at 54.4. New orders index at 51.1 frm 53.1, employment index at 56.5 frm 60.4 and prices pd at 70.5 frm 61.5. The ISM report overall was weaker than thought with declines in employment and new orders. The initial reaction dropped the DJIA from +66 to +27 and falling; the 10 yr note was -14/32, the knee jerk at -6/32; mortgage prices improved a little. On the margin the ISM was a disappointment for equity markets and should support the bond and mortgage markets through the session.
Technically; that the 10 yr note has failed to push into new low yields after testing them the last three days, isn't encouraging in the near term. The 10 yr low at 2.42% on an intraday trade is seen by investors as a level that must be violated to keep the interest rate rally moving forward. That it is running into selling suggests the note may increase in yield and pull mortgage rates up a little along with it. Support for the 10 yr if it continues to increase will come at the 2.65% area.
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