Generally a quiet open this morning. Markets are likely to sit somewhat still through the day today ahead of the beginning of Bernanke’s testimony tomorrow at the House Financial Services Committee; Thursday he moves to the Senate Banking Committee. The obvious topic is what is he thinking now about beginning the end of the QEs? Generally most all market participants are expecting the Fed to start tapering soon, the question is when? Most of the talk has been centered on September for the first cut in the $85B of monthly purchases, some think a cut of $20B a month. Bernanke has been going back and forth with his comments since June 19th at his press conference that shot interest rates higher when he said the Fed was ready to start pulling back because the economy was improving and the labor market was gaining momentum. Then after the bond market spiked and likely surprised him, is next speech he back-peddled somewhat; saying the employment situation wasn’t as good as the data was implying. Low wages and part-time workers count as employed but won’t ass much to consumer spending; also the percentage of would be wage earners is the lowest on record---only 63% of working age people are actually in the labor markets.
8:30 this morning June CPI was reported up 0.5% a little higher than 0.4% expected; when food and energy are subtracted CPI up 0.2% in line with estimates. June saw a big increase in gasoline prices. Yr/yr CPI +1.8%; yr/yr core +1.6%, neither are an issue being well under the Fed’s 2.0% target. Bernanke worries that inflation isn’t strong enough, we have argued that inflation is too low and is a drag on economic growth. Of course inflation levels over 2.5% would be a worry point for fixed income investors but with most of the global economy swooning now there is little reason to worry about increasing prices except for gasoline with crude oil now at $107.00/barrel.
At 9:15 June industrial production was expected +0.3%, it was right on at +0.3%. June factory usage (capacity utilization) was thought to be at 77.7% frm 77.8% in May, as reported a little better at 77.8%. There was no market reaction to the data. The final data today at 10:00, July NAHB housing market index estimates at 52 unchanged frm June, the index increased a whopping 6 points to 57 (June revised to 51 frm 52); the index is now the highest since January 2006. The components within the data were also higher than expected. The reading over 50 is considered expansion. A solid reading but no immediate response. Not much matters today ahead of Bernanke tomorrow.
At 9:30 everything flat; the DJIA opened +2, NASDAQ +2, S&P unch; 10 yr note 2.54% -1 bp, 30 yr MBS price +3 bps. The day will be a waiting day ahead of Bernanke tomorrow and Thursday.
After running up to 2.73% the 10 yr has come back about 20 basis points in rate and mortgage rates have eased a little. The markets are still technically bearish; the 10 yr needs to close below 2.50% and it is getting close at 2.54%, we still haven’t seen a lot of new buying just short-covering that has pushed rates down. The bond market has been led around by Bernanke and other Fed officials coming out with conflicting comments. It isn’t clear now how low the 10 yr and mortgage rates can fall but the more macro outlook remains the same, the lows in mortgage rates are unlikely to been seen again. As long as the economic outlook continues to improve demand for low yield fixed income investments will lag. One factor that helps is that inflation is not a factor in the present outlook.