Escalating tensions in the Mideast coupled with weak manufacturing data in the Euro region are supporting Bond prices this morning.
In housing news, Black Knight Financial Services reported that home prices were up 0.9% from March to April and up 6.4% year-over-year. Later this morning, May Existing Home Sales will be released.
Treasuries and MBSs opened stronger this morning with the 10 falling to 2.59% and testing its recent low at 2.58%. At 9:00 MBS price +9 bps from Friday’s close and 29 bps better than at 9:30 Friday morning. This is a big week for the bond and mortgage markets; a number of reports on the housing sector, the final Q1 GDP, PCE reported with May personal income and spending, Treasury auctioning $94B of notes.
Last Tuesday after months of generally ignoring any immediate concern that inflation would increase, the May CPI jumped to +2.2% yr/yr. The increase shook investors and traders, then Janet Yellen on Wednesday commented that the higher inflation in May was in her opinion just ‘noise’ within the data, taking a little sting from the CPI. On Thursday then, the Philadelphia Fed reported that the prices paid component in its business index increased 12 points to 35 from 23; once again inflation fears increased. It doesn’t take a lot to ignite inflation concerns with long term interest rates at these current low levels; inflation is the kiss of death for investors holding fixed income investments. Last week Treasury auctioned inflation indexed notes, the rate bid translated to the auction suggests investors are now expecting 2.28% inflation over the next year. Some now changing their outlook for when the Fed would begin increasing rates from mid-2015 to the first quarter of 2015. Stay tuned as undoubtedly inflation is now make on investor and traders radar. The next look at inflation is Wednesday with the Q1 GDP data, and Thursday with personal income’s PCE.
At 9:30 the DJIA opened -14, both NASDAQ and S&P were unchanged; the 10 yr note at 2.60%, up from 2.59% at 9:00, 30 yr MBS price +3 bp, down from +9 at 9:00.
May existing home sales at 10:00; estimates were for an increase of 2.2% from April to 4.75 mil units (annualized). As reported sales increased 4.9% to 4.89 mil; the mid-west was where most al the gains were from. The median sales price $213,400, up 1.% from April and +5.1% yr/yr the slowest yr/yr increase since April 2012. Based on the pace of sales in May there is a 5.6 month supply. Still no increase in first home buyers; we believe first home buyers are not going to step up compared to previous housing market rebounds. Young people do not have the same drive to buy as they used to have before the recession; too much debt, can’t save enough for a down payment, and tight credit and low incomes.
With Stock prices near record levels and coming under some pressure today, I am recommending floating. Have a great week!