|This morning the bond and mortgage markets opened better, the early activity in stock indexes slightly weaker at 8:30. Don’t mean to beat the drum, but as we have reminded almost every day these days, uncertainty about the economic outlook, deflation concerns, the ECB stimulus are causing a lot of intraday and interday price volatility.
Yesterday the ECB’s announcement of a huge stimulus package attempting to stop the deflating economies and avoid falling back into recession was met with enthusiasm in the US markets, this morning the European stock markets are rallying a little, although not a big move. Yesterday the US stock market improved on the stimulus announcement, the DJIA up 260 points, the 10 yr note a little soft but held well through the afternoon. MBSs were under pressure for most of the day yesterday but managed to end the day about unchanged.
The ECB will buy 1 trillion € ($1.16B); a nice start but the plan by itself will not turn the deflating economic condition or the economies in the region. The stimulus was widely expected, that the package was a little more than thought encouraged investors and traders. Stupid is as stupid does; to believe that the European economies will begin to grow is a serious reach; by itself it won’t do much to increase employment that is running at 25% in the southern Europe countries. Mario Draghi in his press conference admitted the limited effect more money printing will have; “What monetary policy can do is create the basis for growth,” he said. “But for growth to pick up, you need investment; for investment, you need confidence; and for confidence, you need structural reform.” At the moment there is little confidence in the outlook. The EU inflation rate is a meager 0.3%, in the US 1.6%; the targets for both is 2.0%. The Fed has tried with trillions of stimulus QEs and still hasn’t been able to get the inflation up to its stated target; Europe has an even steeper climb. €60 each month beginning in March of purchases can’t hurt but the real question is will it help. If the Fed’s experience is any measuring stick the result won’t meet the intended result.
The ECB stimulus is rallying debt markets across Europe and here this morning. The bond buying plan launched yesterday drove yields down in a number of countries in the Eurozone, including Germany, France, Spain and Italy, fell to record lows, extending the record-setting streak over the past months. Declining rates in Europe will pull US rates lower, it is about the spread between the US rates and rates in other economies; as long as rates slip in Europe the US markets will benefit. The monetary stimulus program comes at a time when demand for bonds, especially high-grade government bonds, remains strong due to the uncertain global growth outlook, which will keep bond yields at historically low levels.
The US stock indexes opened generally unchanged; the DJIA -15, NASDAQ -3, S&P -2, the 10 yr treasury at 1.83% down 5 bps, 30 yr MBS price +16 bps from yesterday’s closes.
Most focus this week has been mostly on the ECB QE. This morning at 10:00 Dec existing home sales were thought to be up 3.7% from November to 5.10 mil; as reported sales increased 2.4% to 5.04 mil units, not a good report. For all of 2014, sales of previously-owned houses fell 3.1% to 4.93 million. The median price of an existing home advanced 6% in December from the same period a year earlier, to $209,500. First-time buyers accounted for 29 percent of all purchases, down from 31% a month earlier, the report showed.
Also at 10:00 Dec leading economic indicators expected up 04%, was up 0.5%.
The technical picture is still bullish; yesterday the 10 yr hit its 20 day average and successfully held. These days relying on how investors and traders are actually doing instead of trying to handicap the fundamentals is difficult and extremely uncertain. We always make our decisions on what markets are doing rather than attempting to read the tea leaves; what markets are doing is the most reliable analyzing the news. Looking at the longer situation, we believe rates will remain low this year, maybe a little higher from these levels but 3.0% on the 10 yr note is as high as we expect presently.
PRICES @ 10:15 AM
- 10 yr note: +13/32 (41 bp) 1.82% -6 bp
- 5 yr note: +7/32 (22 bp) 1.32% -6 bp
- 2 Yr note: +1/32 (3 bp) 0.51% -2 bp
- 30 yr bond: +38/32 (118 bp) 2.39% -6 bp
- Libor Rates: 1 mo 0.166%; 3 mo 0.257%; 6 mo 0.358%; 1 yr 0.621%
- 30 yr FNMA 3.0 Feb: @9:30 102.61 +16 bp (+4 bp from 9:30 yesterday)
- 15 yr FNMA 3.0 Feb: @9:30 104.63 +4 bp (-7 bp from 9:30 yesterday)
- 30 yr GNMA 3.0 Feb: @9:30 103.09 -5 bp (+15 bp from 9:30 yesterday)
- Dollar/Yen: 117.80 -0.69 yen
- Dollar/Euro: $1.1233 -$0.0133
- Gold: $1294.60 -$6.10
- Crude Oil: $45.81 -$0.50
- DJIA: 17,752.94 -61.04
- NASDAQ: 4751.37 +0.97
- S&P 500: 2056.95 -6.20