Interest rates started higher (yield) this morning; the 10 yr note at 2.02% early and 30 yr MBSs -21 bp frm yesterday’s close at 9:00. Stock indexes prior to the 9:30 open were trading slightly better. Europe’s stock markets trading higher today. At 9:30 the DJIA opened +4, NASDAQ +9, S&P +2; 10 yr note 2.02% +5 bp frm yesterday’s close and 30 yr MBSs -24 bp frm yesterday’s close.
Last night’s State of the Union address didn’t provide any surprises, about what had been expected. The Pres. wants to increase the minimum wage from $7.25 to $9.00, boost the economy will huge increases in infrastructure spending to repair thousands of bridges, increases in taxes, reducing the deficit, increase education with changes in high school curriculum, getting jobs back to America; generally the same agenda he has pushed during his tenure. On the coming sequester that is set to cut $1.2 trillion in automatic spending cuts on March 1st, the Pres. railed that it was unfair and should be abandoned. That he was the one that agreed on it in August 2011 appears to have escaped him, pushing the can down the road, sometimes the can has to stop rolling. He also pledged to pursue a trade agreement with the 27 nation Euro zone that could increase export sales, discussions have been taking place on a trade pact, with added emphasis it might actually get done. One thing that has bi-partisan support is immigration reform, both parties seem to agree it should be done but like most all issues these day each group has a different plan. Overall, based on initial market responses, markets saw little new in his speech.
Jan retail sales at 8:30; overall sales were up 0.1%, ex autos +0.2% and ex autos and gasoline +0.2%. Sales in Dec were +0.5%, unrevised. The slowdown likely due to the increases in payroll taxes that kicked in Jan 1st. Also at 8:30 Jan import prices, increased 0.6%, the first time in three months, led by more expensive fuel and building materials. Dec import prices originally reported -0.15 were revised to -0.5%. Yr/yr import prices declined 1.3%.
At 10:00 Dec business inventories, expected up 0.3%; as released inventories increased 0.1%; Nov inventories originally reported +0.3% were revised to +0.2%.
This afternoon Treasury will auction $24B of 10 yr notes, it will be a new 10 yr note. The demand will be critical; rates have increased, if demand isn’t strong it will add to the underlying bearishness in the bond and mortgage markets. Yesterday’s 3 yr note went OK, about the norm for a three year note.
This morning the bellwether 10 yr note traded at 2.03%, the previous interday high back on Jan 30th was 2.04%. The note is vulnerable, if it fails to hold and closes above 2.05% expect increased selling with the yield increasing to 2.15%. Still depends on stock market trading, the key indexes appear to be relentlessly moving to new all-time highs; the market remains technically overdue for a correction, as long as it increases interest rates will also increase. The coming sequester cuts in spending don’t appear to be bothering stock markets, believing the automatic cuts won’t happen as Republicans will capitulate. The rate markets are going to head higher over time, the 30 yr bull market in interest rates is over. That said, we still have the Fed QE that will continue and keep rates from increasing as much as without the $85B of monthly buying of treasuries and mortgages. Our advice remains unchanged, on any rallies lock in rates; don’t expect rates will fall much.