Not a good start today in the bond and mortgage markets. The 10 yr note at 9:00 1.87% +4 bp, 30 yr MBSs -25 bp frm yesterday’s close. 8:30 data was quite a surprise; weekly jobless claims were thought to be down 3K, claims fell 37K to the lowest claims seen in five years (Jan 2008) to 335K. The Labor Debt did point out that there was difficulty with adjustments after the holidays when seasonal workers were let go. Nevertheless the huge decline adds evidence that businesses are increasingly more optimistic with their employment levels. Twenty-nine states and territories reported an increase in claims, while 24 reported a decrease. The increase in payroll taxes that began this month may however keep businesses frm increasing hiring until there is evidence of how the increase will impact consumer spending.
Not only claims surprised; Dec housing starts were expected to be up about 3.0%, as reported starts increased a whopping 12.1% to 954K annualized units, the best the best year for housing since 2008. Construction of single-family houses climbed 8.1% in December from the prior month to a 616,000 annual rate, also the highest since June 2008. Work on multifamily homes, such as apartment buildings, climbed 20.3% to an annual rate of 338,000. For all of 2012, builders began work on 780,000 homes, up from 608,800 a year earlier. Starts jumped by 28.1% in 2012 from the prior year, the biggest annual gain since 1983. Building permits were expected to be up 0.7%, as reported up 0.3%. Most every housing data report has indicated the sector is well on the way to recovery with low mortgage rates driving builders and consumers.
The two reports boosted the stock index futures prices and increased rates on treasuries and mortgages. At 9:30 the DJIA opened +25, NASDAQ +13, S&P +3; 10 yr note 1.87% +4 bp, 30 yr MBSs -20 bp.
At 10:00 another key report; the Jan Philadelphia Fed business index was expected at 6.0 frm 8.1 in Dec, the report reported a decline of -5.8. After two earlier strong economic reports the decline of the index has taken some of the rally out of the market in the stock indexes and improved MBS prices since 9:30, but only slightly.
Late this afternoon the Fed will report its balance sheet; based on estimates frm private sources the Fed has a balance sheet of $2.9 trillion, hard to put that in context but it is so large that it is beginning to concern financial markets that unwinding the size (selling those securities) may eventually cause disruption within the markets. That would be the case if the Fed simply began dumping MBSs and treasuries en mass but that isn’t likely; it will be a slow selling process. Given that interest rates will continue to increase over the next year or two, the Fed will likely take losses on its portfolio. Those anticipated losses, if they actually occur, is the price America will pay for the Fed’s money printing. More likely, the Fed will just hold most of the securities and earn the returns on the low yield investments. The minutes frm the Dec FOMC meeting suggest the FOMC is beginning to take seriously the implications of continuing the QE initiatives.
Yesterday the bond and mortgage markets traded to their respective 20 day averages but were not able to break the technically bearish pattern. This morning rates are increasing on the 8:30 data but still are not making new high yields or low prices. The markets are continuing to hold within narrow ranges, however the increasing belief that rates have run their course and are more likely to increase than decline much have kept any rallies in check. One major support keeping rates from increasing much is the debt ceiling debate; we expect the ceiling will be increased after a month of talk and threats. A failure to increase the ceiling would cause US interest rates to increase substantially, weakening the anemic recovery, cause rating agencies to cut the US debt rating and push the economy back into recession; in the end it really isn’t an option.
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