Congress gets back to business with the House Republicans offering a bill to increase the debt ceiling for four months. The Republican-led House of Representatives announced plans to vote on a bill as soon as tomorrow to temporarily suspend the U.S. debt limit until May 19. The extension is supposed to allow more time to deal with spending cuts, whether the President will go along isn’t known, but markets are optimistic. Economic releases this week are focused on the housing market with existing and new home sales and the FHFA house price index. Weekly claims fell to 335K last week, this week the early forecast is a rebound to 360K +25K. Effects from Hurricane Sandy continue to distort the monthly comparison of the four-week average which further clouds the data's usefulness as a gauge for the monthly employment report. The four-week average is down 6,750 to 359,250 which is about 10,000 below the mid-December level.
For the last 10 sessions the 10 yr note yield has been tied into a 5 basis point range on its rate; MBS markets are showing a little more technical bearishness than the 10 yr but also are trading in a 50 basis point price range for the last 12 sessions. MBSs slightly falling in favor by investors concerned about early pre-payments and the overall low level of interest rates. The is a strong undercurrent now in the interest rate world that the path going forward is up for rates; slowly as long as the Fed is still buying $85B of treasuries and mortgages each month. Next week the FOMC will meet again; after the minutes from the Dec meeting rocked markets, the Fed likely will try to soften concerns that the Fed is ready to end the easing moves.
The US is continuing to improve, the best situation in the last two years according to a Bloomberg survey of international investors conducted last Thursday, with the majority describing the economy as improving. Almost three in five expect to reduce their holdings of Treasuries in the coming six months, while fewer than one in 20 plan on an increase. Two-thirds plan to boost stock holdings in the period. As we have been noting for the last couple of months, the long decline in US and global interest rates has abut run their courses. While we continue to believe rates won’t increase a lot, the outlook for lower rates has at the moment been abandoned by most investors. As long as the Fed stays in the game with $85B of treasury and mortgages purchased each month, rates are unlikely to increase much frm present levels. That said, there is a lot more risk in being long bonds now than being short.
The President’s inaugural speech yesterday has been characterized as rather combative by those the research such things. He called for the nation to rise up against partisan deadlock which was in contrast to his 2009 inaugural, in which he spoke of choosing “hope over fear, unity of purpose over conflict and discord” and proclaiming “an end to petty grievances.” Obama said programs such as Medicare, Medicaid and Social Security “do not make us a nation of takers; they free us to take the risks that make this country great.” There was little in his speech about the status of the economy.
At 9:30 the DJIA opened +18, NASDAQ -1, S&P +1. 10 yr note 1.87% +2 bp and 30 yr MBSs -8 bp.
At 10:00 Dec existing home sales were expected up1.2%, sales were down 1.0%. Yr/yr +9.2%, median sales price $180K, up 11.0% yr/yr. Based on sales there is a 4.4 month supply, the lowest level of inventories since May 2005 before the bubble broke. 1.8 mil homes on the market, down 22% yr/yr.
Not much in the way of data this week; weekly jobless claims on Thursday and new home sales on Friday. Most all of the technical indicators are still bearish, although there has not been much change in interest rate over the last couple of weeks. The Fed’s buying is a huge hurdle for interest rates increasing much and should keep rates stable this week. Next week the FOMC meets again, traders waiting to see what, if any, comments are revealed that counter the minutes frm the Dec meeting when there were more discussions frm the group on an exit strategy.
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