US stock index futures trading early this morning were fractionally better, the 10 yr note yield as a result started a little higher with early MBS trade about unchanged. Again today, no key economic reports; the main focus today will be this evening’s State of the Union address. What will he say, how will he phrase his growth plans, how will he confront the increasing deficit, what will he say to counter the Republican demands that no taxes be increased? The Republican response will be delivered by Sen. Marc Rubio. A lot of questions that will dominate thinking through the day; by the end of the day today we expect interest rates and the stock market to be close to unchanged.
At 9:30 the DJIA opened +10, NASDAQ -1, S&P +1; 30 yr MBS price -9 bp with the 10 yr note yield at 1.99% +3 bp.
Fed Vice-Chairwoman Janet Yellen speaking yesterday defended the Fed’s continued easy money policies calling the unemployment rate too high and that it is “entirely appropriate” for the bank to focus on employment. Not surprising, Yellen is considered one of the doves at the FOMC. There is no indication the Fed is preparing to end the QE, purchasing $85B of treasuries and MBSs each month. There is discussion within the FOMC about how, when it is appropriate, the Fed will engineer its withdrawal; not likely this year. According to data from Cantor Fitzgerald total agency MBS production for Jan. was $140.5BB, up $28.1BB (25%) vs. last month. The increase in production was due to low level of production in Dec. as originations pushed up as much of their supply as possible to Nov. to avoid the G-fee hike that started Dec. 1st. 30yr production was $101.9BB, up 23% month-over-month while 15yr production was $25.8BB, up 25% vs. Dec. The Fed is buying $40B of MBSs each month.
The National Federation of Independent Business released its optimism index this morning; expected at 89.5 frm 88.0 Dec, was at 88.9. NFIB said “still one of the lowest readings in the survey’s 40 year history”. “All that happened in the “cliff negotiations” was that taxes went up, 2 percent for everyone as the temporary cut in the FICA tax was restored and the marginal rates for the “rich” ($400k and up) were raised. Obama Care taxes and costs were off the table for discussion. There were no real cuts in spending, just the recognition that some spending was slowing as it was programmed to do. The real sequestration cuts were kicked down the road again. The message to the private sector was the same – management incompetence, no leadership. So, “uncertainty” as to the management plan to get USA Inc. back on a sound fiscal track was not resolved. The fourth quarter decline in GDP was not a confidence builder either. Although a lot of the decline was attributable to events not likely to be repeated any time soon (government spending reductions and a sharp reduction in inventory build), growth would still have been about 2 percent without those hits –nothing good happened to offset them. And, the decline in imports is highly correlated with a decline in GDP. Business investment and housing looked OK, consumer spending, especially on non-durables and services was not strong. The Fed continued its liquefaction of assets in the economy, building profits at the big banks but condemning savers and retirees to lousy returns for years to come. It was hard to find good news, globally or nationally.”
11:30 has KC Fed President Esther George speaking at the U. of Nebraska; at 1:00 Dennis Lockhart, Atl. Fed Pres. in Madrid.
This afternoon at 1:00 Treasury will auction $32B of 3 yr notes at its quarterly refunding. Tomorrow $24B of 10s and Thursday $16B of 30s. The auctions, particularly tomorrow’s 10 yr note, will put some additional pressure in the treasury market. IN the absence of anything more significant traders will approach the auctions with caution.
At 2:00 Treasury is scheduled to report the January budget details; estimates are for the budget short-fall to be just $2B.
Over two weeks now that the 10 yr note rate has traded in a 6 bp range based on closes; MBSs also confined in a narrow range. The stock indexes also marking time the last few sessions. Still looking for the elusive correction in stocks, but so far all there has been is no increases, there hasn’t been any sustained selling in the indexes. Market should trade quietly today ahead of the State of the Union at 9:00 this evening. Treasuries and mortgages are still holding bearish technical readings.