|A strong rebound yesterday after the selling on Friday on Yellen’s speech. On further thoughts markets reversed the selling on Friday and actually ended better than prices and yields on Thursday last week prior to Yellen at Jackson Hole. This morning a little pull back but not much in early trading. Yesterday the dollar was generally flat, this morning the dollar stronger against a basket of currencies, the index at 95.87 +0.30 and better against the yen and euro. Focusing on the dollar these days helps understanding what the world believes the Fed will do; not likely to increase rates in Sept and still a toss-up for Dec. The media (CNBC, Bloomberg, Fox News) tilting toward a rate increase soon; the markets where the reality is, not so sure at the moment.
Stanley Fischer, Federal Reserve Vice Chairman, saying that the U.S. economy was close to full employment, reinforcing speculation that policy makers are moving toward raising interest rates. The dollar index increased to a three week high on his remarks. On negative interest rates (something the Fed is not thinking about) Fischer said “We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.” Translation: negative rates hurt consumers but keep stock markets from facing economic reality. In Japan where negative rates are likely to become more negative household spending fell 0.5% in July from a year earlier, Japan’s economy is struggling to gain momentum, evidenced by slower expansion in gross domestic product than economists forecast in the second quarter. Negative rates working?
July personal spending was less than expected yesterday but not much; +0.3% down from +0.5% in June. June though was strong and one month shouldn’t cause much change in outlooks, regardless of one’s opinion; consumer spending rose for a fourth month. At 9:00 the June Case/Shiller home price index, +5.1% as expected. We don’t pay a lot of attention to it but it does get noticed.
Crude oil has stabilized at a decent level keeping gasoline prices down. The price of food at home is down 1.6% on a seasonally unadjusted basis in the 12 months through July, says the BLS. Inflation worriers should pay more attention to the levels. No inflation in those sectors, no inflation in consumer prices, no pricing power in businesses; yet Yellen and Fed officials continue say inflation is increasing. Not sure what they are looking at; consumer staples are flat to declining.
At 9:30 the DJIA opened unchanged, NASDAQ +4, S&P +1. 10 yr 1.57% unchanged. FNMA 3.0 30 yr coupon -2 bps from yesterday’s close but up +20 bps from 9:30 yesterday.
At 10:00 the Conference Board released its August consumer confidence index,expected unchanged at 97.3 originally reported, confidence increased to 101.1 the best read since Sept 2015 but July revised from 97.3 to 96.7. Three thousand households across the country are surveyed each month. In general, while the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month. There was no negative reaction to the better index in the bond and mortgage markets.
Nothing left on the schedule today. Friday’s employment report still the elephant in the room. With employment on the clock we don’t expect much improvement in the bond and mortgage markets. Even with the volatility Friday and yesterday unlikely interest rate markets will move much. Our technicals still remain in neutral levels.
PRICES @ 10:10 AM
10 yr note: -1/32 (3 bp) 1.57% unch
5 yr note: -1/32 (3 bp) 1.18% unch
2 Yr note: unch 0.81% unch
30 yr bond: -5/32 (15 bp) 2.22% unch
Libor Rates: N/A
30 yr FNMA 3.0 Sept: @9:30 103.80 -2/bp (+20 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 104.77 -7 bp (+9 bp from 9:30 yesterday)
30 yr GNMA 3.0: @9:30 104.70 -3 bp (+19 bp from 9:30 yesterday)
Dollar/Yen: 102.64 +0.72 yen
Dollar/Euro: $1.1153 -$0.0037
Gold: $1321.00 -$6.10
Crude Oil: $47.37 +$0.39
DJIA: 18,464.47 -38.52
NASDAQ: 5231.69 -0.64
S&P 500: 2177.84 -2.54