After weeks of little volatility in stock and bond markets yesterday markets experienced a dose of activity. Early yesterday morning the DJIA opened better and interest rate markets were weaker, 30 yr MBSs at 9:30 were -18 bp. At the end of the day the stock market took a huge hit and interest rates fell to their lowest levels since late January. The 10 ended at 1.86%, 30 yr MBSs up 56 bp on the day and 74 bp better than at 9:30. For a few weeks now even the most bullish traders and investors have been looking for a correction and retracement in the stock market, yesterday finally the indexes rolled over on news that the Italian elections were messy; the elections split power between two differing parties and resurrected fears of Italy leading a revolt among voters over the stringent cuts in spending and potential defaults. Way too soon to draw any real conclusions but markets, already set up for a pullback, were not going to wait around for more analysis.
The DJIA lost 216 points yesterday but this morning the index and the other two key indexes are starting better; no follow-through from yesterday. At 9:00 the DJIA futures were pointing to the index to open 60 points better; the 10 at 9:00 -4/32 at 1.88%, 30 yr MBSs holding well, -4 bp frm yesterday’s close. At 9:30 the DJIA opened +61, NASDAQ +11, S%P +6; 10 yr note -6/32 (19 bp) to 1.89% +3 bp; 30 yr MBSs -4 bp frm yesterday’s close.
Today has a lot of data and news; at 9:00 the Dec Case/Shiller 20 city home price index was expected to be up 0.8% frm Nov and yr/yr +6.8%; the increase from Nov just 0.2% while yr/yr price increase was right on at +6.8%. The report continues to show the housing markets are slowly improving. Also at 9:00 the Dec FHFA house price index, the estimates were for an increase of 0.7%, as reported the index was up 0.6% with yr/yr +5.8% frm +5.6% in Dec. Both data pints are two months ago. At 10:00; Jan new home sales were expected +3.2% to 381K annualized units, as reported sales were up a huge 15.6% and Dec sales were revised from 369K units to 393K.; sales blew the doors off in Jan and the revision to Dec makes the increase in percentage points even stronger. Also at 10:00, Feb consumer confidence index was expected at 61 frm 58.6 in Jan, as reported the index jumped to 69.6. Both reports were better but the initial reaction didn’t generate increases in stock indexes---actually the key indexes declined on the reports.
This morning Ben Bernanke will go to the Senate Banking Committee for his required semi-annual testimony on monetary policy and the economy. Tomorrow he moves over to the House for the same issues. His opening statement and the Q and As will be closely monitored. He will echo President Obama’s comments that the sequester will lower GDP growth; we don’t agree with the exaggerated concerns.
At 1:00 this afternoon Treasury will sell $35B of 5 yr notes; yesterday’s 2 yr note auction was disappointing and saw less demand than previous 2 yr auctions.
Sequester coming; no way to stop it now but likely there will be some compromise a week or two from now. Is it really as scary and disastrous as the White House is trying to paint? We doubt it. The sequester will cut a measly $85B from a $3.6 trillion budget, how much damage to the economy can that cause? We submit, not much and compared to the White House fear mongering, hardly at all. It was not a budget issue when the government was willing to cut a check to storm victims Sandy for $60B, it wasn’t doom and gloom, it wasn’t even a debate; not to diss the need for help for the storm victims, just a comparison to think about. The sequester will cut spending by an anemic 2.3% but to hear it from the media and the White House we will all be lining up for unemployment next month and poor people will be starving in the street. Obama is quoted as saying the small sequester cut will cut 0.5% of GDP growth this year; the media buys it but markets certainly don’t, it is simply not possible to cut GDP by 0.5% growth cutting $85B from a $3.6 trillion budget.
Technically, the bond and mortgage markets broke a number of key technical reads; the 10 closed down under its 20 and 40 day averages, broke a major uptrend line going back to last Dec and broke through a five week trading range. The 3.0 Mar FNMA coupon broke above its 20 day average (price), the first time since mid-Dec it has traded above the average. How much lower rates can fall depends on the fear factor from Europe and how it develops and how the US stock market trades. So far today the stock indexes are bouncing back in a strong rally, up 90 points on the DJIA prior to 10:00 today (see 10:10 prices below). We expect to see an increase in volatility in financial markets over the next few sessions; after rather quiet trade for a couple of weeks, markets are likely to heat up with an increase in price swings.
Comments(0)