|Finally…a solid April economic report. April housing starts expected to be up 10% were up 20%, permits expected to be up 2.9% were up 10%. Starts in March revised from 926K to 944K; permits in March were revised to 1.038 mil from 1.039 mil. This report is the best data we have seen in April releases and long overdue; no weather and the outlook looks a little brighter. Starts now the highest in seven years Nov 2007). Construction of single-family houses in all the U.S. jumped 16.7% to a 733,000 rate, the most since January 2008. Multi-family homes, such as townhouses and apartment buildings, climbed 27.2% to an annual rate of 402,000. Three of four regions showed gains, led by the Northeast and West. The South was the only area with a decline. Purchases of previously owned homes jumped in March by the most in four years, while those of new home sales, a smaller part of the market, fell to a four-month low. Thursday April existing home sales will hit.
The ECB surprised markets today, announcing it will escalate its bond buying QE to avoid too much buying in the quiet summer holiday period. Looks like the ECB is also interested in stopping the increase in the euro currency. ECB doesn’t want the currency to increase, a soft euro helps to drive inflation higher. The dollar this morning is stronger against the euro and the yen. The ECB said that more assets could be purchased in September to make up for shortfalls in July and August. The total size of the program will remain the same, at 60 billion euro/month until September of 2016.
The ZEW Economic Sentiment Index for Germany fell to 41.9 in May from 53.3 in April, well short of expectations. Inflation in the U.K. was negative for the first time since 1960; the CPI declined 0.1% yr/yr in April versus no change in March.
When is good news bad news? When the economic releases are stronger than expected. Good that housing starts and permits jumped, bad because it adds concern the Fed will increase rates sooner rather than later. Interest rates increasing this morning on the housing data. The bond and mortgage markets reacting as they should with the surprising increase in starts and permits than were thought.
At 9:30 the DJIA opened +14, NASDAQ +4, S&P +1. The 10 yr note at 9:30 back above its 200 day average at 2.30% +7 bps from yesterday. MBS price -36 bps from yesterday’s close and -57 bps from 9:30 yesterday. The dollar is strengthening driving crude lower this morning.
No more scheduled data today. The bond and mortgage markets launching selling programs after the housing data this morning. The 10 yr high yield was 2.33% last week before it found support and declined to 2.14% last Friday. We can’t stress strongly enough that intraday and interday volatility is severe. This morning already the 10 yr climbed to 2.30% but at 10:00 back to 2.28%, and MBS price at 9:30 -36 bps is now -23 bps. Floating even for an hour can be costly. Keep an eye on the stock indexes today, they opened a little better but the starts and permits tilt the Fed rate increase a little closer, not what stock investors want to see. Thursday April existing home sales, tomorrow the minutes from the April FOMC meeting and Friday Janet Yellen will address the economy. No reason I can think of that will turn the bond and mortgage markets around in the short term. If the dollar is expected to continue declining as it has this morning there is a slight light at the end of the tunnel that may support US interest rates. We won’t front run that idea however, wait for it.
PRICES @ 10:00 AM
10 yr note: -13/32 (41 bp) 2.28% +5 bp
5 yr note: -8/32 (25 bp) 1.59% +6 bp
2 Yr note: -2/32 (6 bp) 0.61% +3 bp
30 yr bond: -23/32 (72 bp) 3.07% +5 bp
Libor Rates: 1 mo 0.184%; 3 mo 0.276%; 6 mo 0.414%; 1 yr 0.725%
30 yr FNMA 3.0 June: @9:30 100.41 -36 bps (-57 bp frm 9:30 yesterday)
15 yr FNMA 3.0: @9:30 104.12 -13 bps (-28 bp frm 9:30 yesterday)
30 yr GNMA 3.0 June: @9:30 101.39 -34 bps (-52 bp frm 9:30 yesterday)
Dollar/Yen: 120.41 +0.42 yen
Dollar/Euro: $1.1157 -$0.0158
Gold: $1214.80 -$12.80
Crude Oil: $58.40 -$0.94
DJIA: 18,286.94 -11.94
NASDAQ: 5076.16 -2.28
S&P 500: 2127.71 -1.49