Mortgage Bonds are near unchanged and off their worst levels this morning after hitting the higher end of the short term trading range on Friday. Higher Stock prices are capping Bonds in the early going.
In housing news, the Case Shiller 20-city Index reported slowing year-over-year price gains. A spokesman from Case Shiller said annual rates have cooled the “most we’ve seen in some time” due to higher mortgage interest rates and difficulties in qualifying for loans.
US stock market in early futures trading pointed to a stronger open at 9:30; the 10 yr note yield jumped another 3 bps to 2.73% after an increase of 3 bps yesterday. Yesterday the intraday volatility was high with two big swings in both stocks and bonds, and MBSs. Today may also experience high volatility; 30 MBS price at 8:45 -11 bps, at 9:10 -3 bps and the 10 yield at 2.72%; US stock index futures off their best levels. Until the April employment report on Friday and with Ukraine playing an increasing role in price movements, uncertainty will be the keystone of the week.
At 9:00 this morning Case/Shiller reported Feb 20 city price index increased 12.9% yr/yr with markets looking for 13.0%; in January the yr/yr price index was 13.2%. The index was the smallest yr/yr in the last 12 months. Growth in property values eased as rising mortgage rates and severe winter weather restrained demand for dwellings in the first few months of the year according to the report. Cooling price appreciation combined with an improving job market will probably help home sales regain momentum later in the year at least that is what the report indicated. The S&P/Case-Shiller index is based on a three-month average, which means the February figure was also influenced by transactions in January and December. The housing sector struggling and not likely to change the slow improvement; economists and markets are going to have to place their bets for a strong increase in growth on consumer spending and businesses to increase investments—a bet that may not prove profitable. Stock indexes came off their best levels and the 10 yr note yield backed down a basis point in yield on the report.
Ukraine/Russia; more sanctions on Putin’s friends announced. The US and EU trying to force Putin to back off by making his buddies sweat; it may have an impact on the Russian economy as the individuals are key economic leaders but hard to understand how severe the sanctions will be. The U.S. sanctions list comprised seven Russian officials and 17 companies that didn’t include OAO Gazprombank or state-development bank Vnesheconombank, as some investors had initially speculated. Deputy Premier Dmitry Kozak was among the 15 names the EU added to its list. In the meantime Russian troops engaged in exercises near the Ukraine border have returned to their base.
The Fed begins the FOMC meeting today, nothing from the meeting until tomorrow at 2:00 with the policy statement. We expect the Fed will taper another $10B of monthly purchases of treasuries and MBSs. Some minor talk that maybe the Fed will pass on tapering at this meeting; if that were to be the case it would likely hammer the stock market and rally the bond and mortgage markets. Any waffling from the Fed now would send a message that the bank is increasingly worried about the economic growth. Even a slower than expected growth path as we have now, it would be a huge mis-step if the Fed were to cave in now.
With the FOMC policy statement tomorrow and April employment on Friday we don’t expect any significant changes in the stock or bond market. Better so far today but recent intraday volatility there is no assurance stock indexes can hold the gains seen so far in the early trading. The stock and bond markets are likely to mark time with wide swings through the rest of the week. The current belief is employment will be better than in March but that is little reason to bet too heavily that it will actually be better. The Ukraine/Russia situation is alive and well and can move markets rapidly pending any news.
I will continue to recommend floating headed into tomorrow’s Fed statement, which is due out at 2pm ET. If anything changes before the release, I will alert you.