The stock market continued its gains today while the long end of the yield curve (10s, 20s, 30s and MBSs) also improved. The 10 finds technical support when it has moved up to 2.90% area and equally resistance when it has moved below 2.80%. Since April 2nd when the 10 rate fell to 2.72% its rate had moved to 2.88% and now backing off to 2.81% this afternoon. There isn’t much that has shaken the strength of long-term rates, trade wars, inflation beliefs spreading like dandelions in springtime, Fed officials uniformly talking about rate increases, the Fed forecasting strong economic growth, the IMF today chimed in with strong growth forecasts even in the face of trade tariffs. Recently China has threatened to stop buying US treasuries, although unlikely, not even that threat has roiled rate markets much. No matter how we explore it, this should not be occurring, rates should be moving higher….but they’re not.

 

Economic data is good in general, inflation is easing higher, and now Q1 1 earnings are starting with most economists and analysts believing earnings will remain strong. Strong earnings equal higher equity prices. Increased talk around also that companies are going to increase buying back their stocks; lots of cash with nowhere to use it. War threats are edging up, might be that has some support to the bond market. The idea of a world war however is almost impossible to believe. Putin, in a phone call to his Iranian counterpart, warned that the world will see ‘chaos’ if Syria is attacked again. Putin wants the UN Security Council involved…so he can veto anything he wants.

 

U.S. homebuilding increased more than expected in March amid a rebound in the construction of multi-family housing units, but weakness in the single-family segment suggested the housing market was slowing. March housing starts and permits; starts at 1319K compared to 1264K consensus and Feb starts were revised higher from 1236K to 1295K. Permits also better, 1354K compared to 1315K expected, also Feb revised better to 1321K from 1298K. Percentage wise starts were up 1.9% from the revised Feb level, permits +2.4% from the revised Feb level. That is the positive news; the less positive; single-family units are soft with starts down 3.7% to an 867,000 rate and with permits down 5.5% to an 840,000 rate in a result offset by a large upward revision to February. Housing completions were down 5.1%; not good given the lack of supply. March existing home sales out next Monday and March new home sales next Tuesday. The same story, builders are not building as needed. Higher prices for products and a lack of developed land.

 

Fed officials today: San Francisco Fed President Williams (FOMC voter and the incoming NY Fed Pres.) says he sees inflation getting to 2.0% this year and staying at, or above, 2.0% for another couple of years. Chicago Fed President Evans (non FOMC voter) says he is okay with raising rates patiently in the absence of inflation. Larry Kudlow, the new National Economic Adviser, says additional Russia sanctions are still under consideration.

 

Some news floating that North and South Korea may announce the end of their war that began in 1950.

 

ECB chief economist Praet says ample degree of policy stimulus is still necessary; the ECB is widely believed to be considering lessening its stimulus and low rate levels.

 

Tomorrow MBA weekly mortgage applications at 7:00 am ET. At 2:00 tomorrow afternoon the Fed will release its Beige Book, detailed economic data from all 12 Fed districts.

 

 

Source: TBWS

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Big day today. Finally, at 2:00 am ET the FOMC statement: by 2:15 the 10 yr note rate +2 bp to 2.93%. At 2:30 Fed chair Powell had his news conference.

 

As expected, the Fed increased the Federal Funds rate by 0.25% to a range between 1.50% and 1.75%. As usual when the FOMC meets markets exhibit a good deal of volatility; the initial reaction sent the 10 yr note yield to 2.93% 4 bps higher than yesterday, MBS prices swung back and forth before settling. The 10 found support at 2.93% and by 4:00 back at 2.88% -1 bp. Fannie 4.0 30 yr coupon up 14 bps on the day and up 20 bps from 9:30. The stock market rallied initially then cooled, the DJIA ran up 237 points before giving back all of the knee-jerk reaction and went negative.

 

  • labor market has continued to strengthen and that economic activity has been rising at a moderate rate.
  • Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.
  • On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent.
  • The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong.
  • In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.
  • The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.

 

As far as more rate increases after a lot of back and forth from market participants it now looks like the Fed will do what we have been projecting; three hikes this year, not four as some were thinking. The initial reactions from media, as usual, talking in circles. Making more of the statement than is necessary. One thing not in the prepared statement, any inference or reference about the trade issues. Overall nothing new in the statement that has much direct significance. The same thing as usual; pending the economic performance and inflation will dictate what the Fed will do in the future.

 

The Fed increased its growth estimates somewhat for 2018; from 2.5% in Dec to 2.7% now; unemployment in Dec for 2018 was 3.9%, now 3.8%, 3.6 in both 2019 and 2020. Inflation in the data unchanged from Dec at 1.9%; also core inflation unchanged from Dec at 1.9%. The range of Federal Funds rate this year 2.1%, 2019 2.9%, 2020 3.4%.

 

Asked about whether there was a discussion in the meeting about the potential of trade problems, Powell said the belief at the Fed is that trade changes will not affect the Fed’s outlook for growth longer term. He remarked some members have spoken with business leaders and that businesses are not as confident as the Fed appears to be.

 

Feb existing home sales this morning were better than expected. Sales of single-family homes rose 4.2 percent in the month to a 4.960 million rate with this yearly reading at plus 1.8 percent. This offsets continued weakness for condo sales which fell a sharp 6.5 percent in the month for a year-on-year minus 4.9 percent. Supply increased to 1.590 mil +4.6%. On Friday, Feb new home sales will be released and expected to show improvement of 4.3% from Jan.

 

Tomorrow not much scheduled news; weekly jobless claims expected about unchanged from the prior week. Feb leading economic indicators thought to be up 0.3 percent.

 

Source: TBWS

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Economic reports having the greatest potential impact on the financial markets are highlighted in bold:

 

 

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September new home sales increased by 18.9% in September, well above expectations.  This is another indicator of growing economy.

 

 

 

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Just about any news these days bolsters the US and global equity markets. Over the weekend, Japanese Prime Minister Shinzo Abe’s election victory lifted world stocks and the dollar this morning. His victory assures Japan will continue its quantitative easing, which means a weaker yen and stronger Japanese government bond prices.

 

Trump also saying that the re-appointment of Federal Reserve Chair Janet Yellen was still a possibility.

 

The 30 stocks in the DJIA continue to headline, but a more detailed look isn’t as shiny; last week the DJIA increased 1.73%, NASDAQ +23, S&P +22. If not for an increase of 24 points on Friday, the NASDAQ would have been unchanged on the week; S&P on Friday +13 points.

 

Last week, the Senate voted to pass a continuing resolution to add $15 trillion to the debt over 10 years. That cleared the way for tax cuts, but still a lot of discussion about how much and to whom. Democrats are not likely to vote for any plan put together by Republicans, and Republicans in each chamber are not on the same page about most anything. There is almost 100% agreement that a tax cut package should happen, but there isn’t anywhere close to that about who gets what and by how much.

 

On Thursday, the ECB meeting, at which it is widely expected the bank will announce the beginning of reducing its QE. Mario Draghi in his recent speeches and comments has prepared markets for the moves to lessen market support.

 

Doesn’t take much these days to push the indexes higher, especially the DJIA. The broader market taking a breather last week and looking at volumes of trading it has lessened recently. That said, no one appears to be outwardly nervous (not selling) even though remarks and statistics are warning of an extended equity market.

 

One data point this morning: the Chicago Fed National Activity Index, expected -0.10 increased 0.17 (August index -0.37). Not much until Wednesday.

 

The key 10 yr. note yield increased 6 bps Friday as the DJIA ran up 165 points; MBS price -24 bps. Very key technical support now for the 10 at 2.40%, tested three times since last May and has held. If the 10 moves above 2.40% it will add additional technical bearishness in the rate markets and will push mortgage rates higher. Nothing new here; as long as equity markets refuse to pull back there isn’t much to push rates down. Inflation remains subdued; that is helping and keeping rates generally stable recently. Our technical models remain bearish in the wider view, but it is all dependent on stock market trading.

 

Source: TBWS

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In the pre-open trade this morning, the stock indexes were better, the 10-yr. note yield up 1 bps to 2.23% from yesterday’s close. No direct new threats from NK, and investors still driving stock indexes higher. Slightly weaker yesterday but no follow-through today, a pattern that has repeated itself for the last two months in equity markets.

At 10:00 AM EDT two key reports: August new home sales, expected +3.5% to 583K, sales declined 3.5% to 560K units. September consumer confidence from the Conference Board expected at 120.2 fell to 119.8 AND August as revised lower to 120.4 from 122.9 originally released. Both soft, but markets yawned, with no declines in stock indexes. I have a hard time with recent data coming in weaker than forecast, yet investors continue to lay huge bets that equity markets will continue to climb. That said, at the moment it is what it is–and going against the trend is a foolish risk.

Janet Yellen’s speech has been changed from 11:50 am EDT to 12:45 pm.

At 1:00 pm, Treasury will auction $26B of 3 yr. notes, tomorrow $34B of 5s and Thursday $18B of 7s.

NK moving aircraft to the east coast according to South Korea intelligence officials after the US flew B-1 bombers close to the peninsula. Investors appear nonplussed, however; no fear evident in how equity markets are reacting, but still there is money moving into safety in US treasuries. Another current support for the US markets, the dollar is gaining strength against the yen and especially the euro after German elections over the weekend that lessened Merkel’s power. The dollar has been in free-fall since the beginning of the year. A strengthening dollar adds to better returns to foreign investors.

Rates holding well so far in the face of continued buying in the equity markets. NK still a worry point but investors seem to be less concerned with the rhetoric increasing and not expecting more than just words and threats. Two kids on the playground saying, “dare me,” neither wanting to take the dare.

Source: TBWS

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Jobs Report

Sep 1, 2017

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Jobs Report

Jul 7, 2017

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May 1, 2017

The stock market continued to march ever higher, especially early in the week when both the small-cap Russell 2000 and the technology-laden Nasdaq Composite Indexes reached record highs.  In fact, the Nasdaq Composite broke above the 6,000 mark for the first time ever.  Investor sentiment was enhanced in response to the election results in France when pro-European Union globalist Emmanuel Macron received more votes than anti- European Union nationalist Marine Le Pen during the first round of presidential elections.  The two candidates will now square off in a runoff election on May 7.

 

However, other political developments both here and abroad managed to keep investors wary.  President Trump’s proposal for meaningful tax reform, threats to pull out of NAFTA, a revised plan repeal and replace Obamacare (The Affordable Care Act), and escalating tensions between the U.S. and North Korea over the North Korean’s ballistic missile testing all combined to impact investor sentiment.

 

Bond yields crept higher as talk of potential tax cuts negatively impacted Treasury prices early in the week.  The yield on the 10-year Treasury reached its highest level in over two weeks on Wednesday, before pulling back as investors contemplated the possibility of a potential government shutdown.

 

In housing, the spring home selling season got off to a great beginning as New Home Sales soared to an 8-month high in March.  The Commerce Department reported New Home Sales at a seasonally-adjusted annual rate of 621,000 for March, easily exceeding the consensus forecast of 590,000.  March sales were the second-strongest since early 2008, and were just slightly lower than last July’s reading of 622,000 while being 15.6% higher than a year ago.  The median home sales price increased 1.2% to $315,000 and is 1.2% higher compared to a year ago while the average sales price increased 5.6% to $388,200.  Inventory continues to slide and at the current rate of sales, it would take just 5.2 months to exhaust available supply.

 

Home prices continue to march steadily higher and this was confirmed by both the Federal Housing Finance Agency (FHFA) and S&P/Case-Shiller.  The FHFA monthly House Price Index (HPI) for February showed home prices rose 0.8% in February and 6.4% annually in addition to an upward revision in January’s index to 0.2%.  The FHFA monthly HPI is calculated using home sales price information from mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac. Because of this, the selection excludes high-end homes bought with jumbo loans or cash sales.  Meanwhile, the S&P/Case-Shiller National Home Price Index soared 5.8% in February, the largest gain in 32 months, when analysts had predicted a 5.7% increase.  This is further evidence strong home buyer demand continues to outweigh supply in the housing market.

 

Furthermore, the National Association of Realtors reported March Pending Home Sales, based upon contract signings, retreated 0.8% to 111.4 from 112.3 in February.  This slight loss in sales momentum was due to the scarcity of available inventory.  Despite the decrease in March, the index is 0.8% above a year ago and was the third best reading in the past year.

 

In the realm of mortgages, mortgage application volume increased slightly during the week ending April 21.  The Mortgage Bankers Association (MBA) reported their overall seasonally adjusted Market Composite Index (application volume) rose 2.7%.  The seasonally adjusted Purchase Index decreased 1.0% from the prior week, while the Refinance Index increased 7.0%.  Overall, the refinance portion of mortgage activity increased to 44.0% total applications from 42.4% from the prior week.  The adjustable-rate mortgage share of activity increased to 8.7% of total applications.  According to the MBA, the average contract interest rate for 30-year fixed-rate mortgages with a conforming loan balance decreased to 4.20% from 4.22%, its lowest level since November 2016, with points increasing to 0.37 from 0.35.

 

For the week, the FNMA 3.5% coupon bond dropped 7.8 basis points to close at $102.797 while the 10-year Treasury yield increased 4.29 basis points to end at 2.289%.  Stocks ended the week higher.  The Dow Jones Industrial Average rose 392.75 points to end at 20,940.51.  The NASDAQ Composite Index advanced 137.09 points to close at 6,047.61 and the S&P 500 Index added 35.51 points to close at 2,384.20.  Year to date, the Dow Jones Industrial Average has gained 5.96%, the NASDAQ Composite Index has advanced 12.34%, and the S&P 500 Index has risen 6.49%.

 

This past week, the national average 30-year mortgage rate rose to 4.09% from 4.05%; the 15-year mortgage rate increased to 3.34% from 3.29%; the 5/1 ARM mortgage rate increased to 3.08% from 3.04%; and the FHA 30-year rate increased to 3.80% from 3.75%.  Jumbo 30-year rates rose from 4.32% to 4.35%.

 

Economic Calendar – for the Week of May 1, 2017

 

Economic reports having the greatest potential impact on the financial markets are highlighted in bold.

 

Date Time

ET

Event /Report /Statistic For Market Expects Prior
May 01 08:30 Personal Income Mar 0.3% 0.4%
May 01 08:30 Personal Spending Mar 0.1% 0.1%
May 01 08:30 PCE Prices Mar NA 0.1%
May 01 08:30 Core PCE Prices Mar 0.0% 0.2%
May 01 10:00 Construction Spending Mar 0.4% 0.8%
May 01 10:00 ISM Index Apr 56.5 57.2
May 03 07:00 MBA Mortgage Applications Index 04/29 NA +2.7%
May 03 08:15 ADP Employment Change Apr 170,000 263,000
May 03 10:00 ISM Services Index Apr 55.8 55.2
May 03 10:30 Crude Oil Inventories 04/29 NA -3.64mln
May 03 14:00 FOMC Rate Decision May 0.875 0.875
May 04 07:30 Challenger Job Cuts Apr NA -2.0%
May 04 08:30 Balance of Trade Mar -$44.4B -$43.6B
May 04 08:30 Initial Jobless Claims 04/29 246,000 257,000
May 04 08:30 Continuing Jobless Claims 04/22 NA 1,988K
May 04 08:30 Preliminary Productivity Qtr. 1 0.1% 1.3
May 04 08:30 Unit Labor Costs Qtr. 1 2.6% 1.7%
May 04 10:00 Factory Orders Mar 0.4% 1.0%
May 05 08:30 Nonfarm Payrolls Apr 180,000 98,000
May 05 08:30 Nonfarm Private Payrolls Apr 175,000 89,000
May 05 08:30 Unemployment Rate Apr 4.6% 4.5%
May 05 08:30 Average Hourly Earnings Apr 0.3% 0.2%
May 05 08:30 Average Workweek Apr 34.4 34.3
May 05 15:00 Consumer Credit Mar $16.0B $15.2B

 

Mortgage Rate Forecast with Chart – FNMA 30-Year 3.5% Coupon Bond

 

The FNMA 30-year 3.5% coupon bond ($102.80, -7.8 bp) traded within a narrower 47 basis point range between a weekly intraday high of $102.86 on Friday and a weekly intraday low of $102.39 on Wednesday before closing the week at $102.80.  Mortgage bonds initially traded down to test support at the 25-day moving average early in the week before bouncing higher for a test of nearest resistance at the 38.2% Fibonacci retracement level ($102.806).  This bounce higher in the later portion of the week resulted in a positive stochastic crossover buy signal.  If the bond manages to break above resistance during this coming week that features numerous potential market-moving economic reports, we could see higher prices and lower yields resulting in a slight improvement in rates.

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