No change today in the uncertainty surrounding Janet Yellen’s comments yesterday that MAYBE the Fed would begin increasing interest rates six months after the tapering is completed, that now is seen to be in Dec. The FOMC statement and Yellen’s comments that the 6.5% unemployment rate target is now deleted frm the Fed’s forward guidance sent markets into panic; the middle part of the yield curve (5 yr notes) increased 16 bps by the end of the day yesterday. The implication, based on the magnitude of the rate increase indicates there was a large build by fixed income investors at the middle of the curve. The 10 yield increased 10 bps yesterday while mortgage rates were up 6 basis points in rate. Markets, all types of markets, are anticipatory vehicles; unless there is an out of the blue event such as we had yesterday, markets always are forward looking. Janet Yellen threw markets a spit ball yesterday when she hinted and a much earlier increase in rates than what markets were expecting (then end of 2015); the reaction to possible rate hikes six months sooner triggered heavy selling in treasuries mortgages and the stock market. No one thought first, everyone reacted without much consideration. Today the stock indexes recovered most of the losses yesterday while the bond and mortgage markets were little changed from yesterday. Yellen, in our opinion, also spoke without thinking. Don’t get specific when talking to the press; we complain a lot about the lack of transparency until we get transparency, then we pay the price of huge volatility. The Fed wants to increase rates more quickly than what had been expected, the Fed is increasingly more concerned that the level of inflation isn’t increasing. The rate of inflation is about 1.0% or less pending on what gauge one uses, the Fed wants and needs 2.0% to bolster economic growth. Janet simply stated what was on her mind but she also continued to say everything is on the table and data dependent; nothing changed from the last year of Fed statements. Economic data this morning was on balance better than estimates; Feb existing home sales was right on forecasts, weekly claims a little better than expected, the Mar Philly Fed index was much better than estimates and Feb leading economic indicators also better, twice as good as thought. There is no scheduled data tomorrow. Pres. Obama ordered more sanctions on Russian officials and a Russian bank as he authorized potential future penalties that would directly target sectors of the Russian economy. “We’re imposing sanctions on more senior officials of the Russian government,” Obama said on the South Lawn of the White House. “In addition, we are today sanctioning a number of other individuals with substantial resources and influence who provide material support to the Russian leadership, as well as a bank that provides material support to these individuals.” Germany and France said the European Union won’t rush to impose economic sanctions on Russia for the annexation of Crimea, as the U.S. stepped up its measures against the Kremlin and its allies. Germany, which is Russia’s biggest EU trading partner, expects the 28-country bloc to expand “stage two” measures in place including travel bans and asset freezes, Chancellor Angela Merkel said before an EU summit in Brussels. It is too early to move to economic retaliation, she said. Our take; as long as Russia doesn’t move on Ukraine there will be no serious sanctions that would deal a blow to the EU and US economy. The 10 is still within its two month trading range, even with the huge selling yesterday. The question now is when will the 10 break above 2.80%? don’t overlook that in the wider picture markets are still betting on higher rates, based mainly on the outlook for a stronger economic growth that will force the Fed to begin increasing interest rates if that outlook becomes reality. That said, handicapping the economy with the weather background is highly speculative. Our stance remains, we don’t have the same positive outlook for the economy as markets do currently; so far based on actual trading neither does the bond market. Presently ( the next week or so) traders are not yet tossing in the towel that the economy will begin to grow more rapidly. Expect more market volatility tomorrow and next week. KEEP LOCKED OVERNIGHT. TOO UNCERTAIN NOW FOR THE NEAR TERM. PRICES @ 4:00 PM 10 yr note: -1/32 (3 bp) 2.78% unch 5 yr note: +1 bp (3 bp) 1.70% unch 2 Yr note: -1/32 (3 bp) 0.43% unch 30 yr bond: -6/32 (18 bp) 3.67% +1.5% Libor Rates: 1 mo 0.157%; 3 mo 0.233%; 6 mo 0.329%; 1 yr 0.555% 30 yr FNMA 4.0 Apr: 103.64 -2 bp (+6 bp frm 9:30) 15 yr FNMA 3.0 Apr: 102.52 -8 bp (+7 bp frm 9:30) 30 yr GNMA 4.0 Apr: 104.73 -3 bp (+3 bp frm 9:30) Dollar/Yen: 102.43 +0.11 yen Dollar/Euro: $1.3776 -$0.0057 Gold: $1329.30 -$12.00 Crude Oil: $99.43 -$0.94 DJIA: 16,331.05 +108.88 NASDAQ: 4319.29 +11.68 S&P 500: 1872.01 +11.24
Posted on: Thu, 20 Mar 2014 20:31:52 +0000
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