June 15th, 2017 9:12 AM by Richard Sardella MLO.100007700
Prior to 8:30 AM EDT data, the US bond market started weaker after the strong rally yesterday and MBS prices lower (higher rates). 8:30 data didn’t help. Weekly claims -8K to 237K, the 4-week average at 243K from 242K the prior week. May import prices expected 0.0% down 0.3%, export prices expected +0.1% dropped 0.7%; yr./yr. imports +2.1% down from 4.1% in April, yr./yr. exports +1.4% from +3.0% in April. The price declines largely oil related, but still less inflation pressure. June Philly Fed business index expected at 26.0 from May’s 38.8, came in at 27.6. New orders continue to increase, at 25.9 vs 25.4 in May and are increasingly being pushed into backlogs, which rose 5 points to 14.0. Employment fell to 16.1 from 17.3; prices paid slipped to 23.6 from 24.2, business conditions fell to 31.3 from 34.8. June NY Fed Empire State manufacturing index expected at 5.0 from -1.0 was 19.8, but that index has a history of large swings.
The 8:30 data overall was not bearish to bonds, nor bullish. The rate markets rallied hard yesterday on the May retail sales, not anything that came from the FOMC and Janet Yellen. Retail declined 0.3% against forecasts of +0.2%, indicating consumers less willing to spend, at least in hard box stores. Also pushing rates lower yesterday, the break of technical levels that generated selling by computers, investors and traders once the 10 yr. broke below 2.20%. The 10 yr ran down to 2.10% at one point before ending yesterday at 2.14% and MBS prices at one point fell 45 bps before finishing +31 bp.
Consensus this morning is that Yellen had a hawkish bent. The FOMC statement and the addendum to the Policy Normalization Policy that made it clearer that the Fed will begin cutting onto its $1.4 trillion balance sheet by the end of the year. The plan is to stop reinvesting the runoffs from principal payments of maturing bonds and securities (MBSs). The plan is to cap the reinvestments in treasuries at $6B per month and MBSs by $4B a month. It is another way the Fed will tighten as well as still talking about one more Federal Funds rate cut this year. Since the 2008 recession, the Fed has been buying a significant quantity of treasuries and particularly mortgages. Less investment means the markets will have to pick up more Treasuries and MBSs. That is going to have as much impact as the Fed tightening the base rate. No definite decision of when it will begin; the Fed setting up markets for the eventuality that will likely happen toward the end of this year.
Part of the FOMC statement:
At 9:15, May industrial production was expected +0.2%, as reported 0.0%. Manufacturing expected +0.2%, as reported -0.4%. Capacity utilization in May expected at 76.8% declined to 76.6% from 76.7% in April. Another key data point that is weaker than expectations, especially manufacturing. Vehicle production fell sharply in the month, down 2.0 percent in a reminder that consumer spending on autos has been very weak this year. And in a reminder of how weak capital goods data have been, production of business equipment fell 0.7 percent. Hi-tech goods, in yet further confirmation of trouble, were unchanged in the month. Initially no reaction to the softness.
At 10:00, June NAHB housing market index, expected at 70, unchanged from May; as reported the index was at 67 and May revised from 70 to 69. Of the index's three components, current sales conditions fell two points to 73, and sales expectations over the next six months fell two points to 76. The component measuring buyer traffic dropped two points to 49, now in negative territory. Yet another weaker than expected data point but no reaction in the bond market.
Bond market not pretty this morning but our technical models and other key technical reads remain bullish. As noted yesterday, 2.22% is the level our work will turn bearish, and in the MBS market, that’s about where it is trading this morning. Looking back and so far today, the bond and mortgage markets did overreact yesterday and no follow-through so far this morning. A drag on US markets today, the strong dollar. If the dollar reverses and begins to strengthen, it will take away a lot of foreign buying that has been one strong propellant for US interest rates.
PRICES @ 10:10 AM
10 yr note: -12/32 (37 bp) 2.17% +3 bp
5 yr note: -7/32 (22 bp) 1.76% +4 bp
2 Yr note: -1/32 (3 bp) 1.35% +1 bp
30 yr bond: -17/32 (53 bp) 2.80% +3 bp
Libor Rates: 1 mo 1.171%; 3 mo 1.250%; 6 mo 1.426%; 1 yr 1.736%
30 yr FNMA 3.5 July: @9:30 103.13 -19 bp (-26 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 103.04 -13 bp (-19 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 104.17 -17 p (-27 bp from 9:30 yesterday)
Dollar/Yen: 110.39 +0.79 yen
Dollar/Euro: $1.1149 -$0.0070
Dollar Index: 97.41 +0.45
Gold: $1256.40 -$19.50
Crude Oil: $44.51 -$0.22
DJIA: 21,296.57 -77.99
NASDAQ: 6124.99 -69.90
S&P 500: 2422.36 -15.56
Richard Sardella has been actively managing and providing services in the mortgage industry for over 27 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.
All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.
MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.