Last Friday the bond and mortgage markets improved a little, but early this morning the bond and mortgage markets started weaker—about the same price changes that occurred Friday. Markets are still focusing on Janet Yellen’s remarks last week that the Fed may begin increasing interest rates as early as next Spring, about a year earlier than what was generally thought prior to her comments. Since her statement, the debate has intensified between those that say no way the Fed will move that soon and those that concur and even say the Fed is likely to stay too long with low rates that will set off inflation. There are no answers, no consensus.
Even Janet Yellen cannot be sure what lies ahead for the economy. The Fed still holds that growth will occur and unemployment will decline; however, the Fed, including Janet Yellen, at times has outwardly worried that the decline in unemployment won’t be due to ‘good’ jobs. Job gains in the food service industry are not jobs that fuel strong economic growth. Investors and businesses were taken aback on her comments, increasing interest rates about a year ahead of what was previously expected; yet even she isn’t that convinced; she also went on to say, “The general assessment is that even after we’ve had an accommodative monetary policy for long enough to get the economy back on track in the sense of meeting our objectives, the stance of policy that will be appropriate to accomplish that will be easier or involve somewhat lower than would be normal short-term interest rates.” We still hold that the economic outlook isn’t as bullish as the Fed and most economists currently think.
This week has a lot of Fed officials speaking, which should add to the confusion with varying opinions and outlooks. Today there is a Fed conference in Washington; at 9:00 Jeremy Stein will provide the welcoming remarks, unlikely that will provide any interest; at 1:45 Richard Fisher (Dallas) speaks in London on forward guidance. Tuesday Dennis Lockhart (Atlanta) and Charles Plosser (Philadelphia). Wednesday (2:00 am) James Bullard (St. Louis). Thursday Sandra Pianalto (Cleveland) and Charles Evans (Chicago). Friday Esther George (Kansas City).
This week Treasury will borrow $96B of notes; Tuesday $32B of 2-year notes, Wednesday $35B of 5-year notes, and Thursday $29B of 7-year notes. Auctions are always important to markets, may be more of an interest after last week’s big increase in interest rates at the middle of the curve (+18 bps on the 5-year). Traders will focus on the demand at the higher rate levels; weak demand would go in the positive column for interest rates.
At 9:30 the DJIA started better after last week’s gains as optimism about the strength of the world’s largest economy overshadowed concern the crisis in Ukraine may escalate; but it didn’t last. The DJIA opened +51, NASDAQ +9, S&P +4; 10-year note 2.77% +2 bp and 30-year MBS price -14 bps from Friday’s close. Ukraine is still in the headlights but so far it is more political than economic; G-7 leaders are in The Hague to discuss Ukraine amid growing concern over a Russian buildup on its neighbor’s border as pro-Kremlin troops seized a Ukrainian base in Crimea. U.S. intelligence and defense officials have warned that Russia has reinforced columns on approaches to major Ukrainian cities, raising concern that Moscow-backed troops may be preparing to carve off more provinces in the country’s east and south in Europe’s worst geo-political crisis since the Cold War, even as Putin is saying he won’t move into Ukraine. Any real serious sanctions are going to be difficult to achieve because Europe is not likely to be willing to take the hard stand Pres. Obama is aiming for.
Although today there are no economic reports, this week has a plate full: tomorrow three housing sector reports and through the rest of the week a number of key data points. Q4 final GDP on Tuesday is expected to be revised higher for the second time; on the preliminary report last month GDP was reported up 2.4%, the final report is expected up 2.7%.
This Week’s Economic Calendar:
9:00 am Jan Case/Shiller (+13.3% yr/yr, +0.7% m/m)
Jan FHFA housing price index (+0.4%)
10:00 am Feb new home sales (-6.0%, 440K units)
March consumer confidence index (78.4 from 78.1 in Jan)
1:00 pm $32B 2 yr note auction
7:00 am weekly MBA mortgage applications
8:30 am Feb durable goods orders (+1.0%, ex transportation +0.3%)
1:00 pm $35B 5-year note auction
8:30 am weekly jobless claims (+3K to 323K)
Q4 final GDP (+2.7% from +2.4% on the prelim report last month)
10:00 am Feb pending home sales from NAR (-0.8%)
1:00 pm $29B 7-year note auction
8:30 am Feb personal income and spending (income+0.2%, spending +0.3%)
9:55 am March final U. of Michigan consumer sentiment index (80.5 from 79.9)
Where to from here? The 10 is still holding a key chart resistance at 2.80%, unable to climb above it but equally not finding much lasting support when its rate falls to 2.70%. Since the 23rd of January the 10 has found comfort in a 20 bp range between 2.80% and 2.60%. Geo-political issues are a factor but not much; with all that is happening in Russia/US relations the financial markets here and in Europe have yet to be seriously rattled. Technicals for both MBSs are mixed but the balance is tilted slightly to the bearish side. Need to watch how stocks act: with lower prices the indexes support the bond and mortgage markets, higher prices take that support away. The Fed comments haven’t moved markets but are generating a lot of debate. Wrap a ribbon around the interest rate markets and the package is neutral presently; one could argue for lower rates and higher rates, there is enough to swing either outlook in a big move. Like that teeter-totter, it is in balance.