March 16th, 2011 8:10 AM by Lehel S.
Treasuries and mortgages opened flat this morning as did the stock indexes, but by 9:00 treasuries and mortgages doing slightly better and stock index futures lower on economic data at 8:30 and still a lot of uncertainty about Japan's problems and its eventual impact on global economies. Crude oil has traded down for the past few days, this morning crude is up over $1.50 at 9:00, gold is also up about $10.00 after heavy selling over the past few sessions. At 9:30 the DJIA opened -50, 30 yr mtgs +8/32 (.25 bp) and the 10 yr note +11/32 to 3.26%.
The Tokyo stock market improved overnight, up 6.5% after huge selling recently. The problems at the nuclear reactors in Japan are still a major concern. The number of deaths in the country is still undetermined, the impact on Japan's economy is still unquantified and its implications to other economies is unknown. Lot of discussions and opinions but nothing of substance that markets can get its arms around. It is going to weeks and maybe months to assess the longer term consequences from the tragedy; in the meantime US markets will likely continue with high degree of volatility. Another earthquake over night; 6.0 magnitude. Reports that many are leaving Tokyo continue to increase.
At 8:30 Feb housing starts were expected to be down about 4.0%; starts were down 22.5% as reported, the lowest start level since Mar 1984. Building permits were expected up 2.0%, they fell 8.2%. Jan starts were revised higher, to +18.4% frm +14.6%. Recent data on home construction has been extremely volatile as the data this morning clearly shows.
Feb producer price index was reported at 8:30; overall PPI jumped a huge 1.6%, more strong evidence that food and energy are going to impact consumer spending. When food and energy prices are left out PPI was up 0.2%. Yr/yr overall PPI +5.6% and ex food and energy +1.8%. The Fed, and therefore markets, still ignore what has always been very volatile food and energy prices when calculating inflation so its all good in the eyes of the Fed and the markets. The problem with that is that food and energy are no longer that volatile, both just continue to increase. At some point, and we don't have any idea when, markets will have to deal with it as consumer spending will be impacted and in turn will be a drag on economic growth. How much of drag and when it will begin to show up in the data we don't want to speculate.
Its Wednesday so we get the MBA weekly mortgage applications. The Market Composite Index, a measure of mortgage loan application volume, decreased 0.7% on a seasonally adjusted basis from one week earlier. The Refinance Index increased 0.9% from the previous week and is the highest Refinance Index recorded in the survey since December 2010. The seasonally adjusted Purchase Index decreased 4.0% from one week earlier. The four week moving average for the seasonally adjusted Market Index is up 4.9%. The four week moving average is up 1.6% for the seasonally adjusted Purchase Index, while this average is up 6.6% for the Refinance Index. The refinance share of mortgage activity increased to 66.4% of total applications from 65.5% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.6% from 6.0% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.79% from 4.93%, with points increasing to 1.07 from 0.87 (including the origination fee) for 80% loans. This is the lowest contract 30-year rate observed in the survey since the week ending January 14, 2011.The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.03% from 4.17%, with points decreasing to 0.85 from 1.15 (including the origination fee) for 80% loans. This is the lowest contract 15-year interest rate observed in the survey since the week ending December 3, 2010.
Inflation in Europe continues to increase; inflation accelerated to the fastest in more than two years in February, increasing pressure on the European Central Bank to raise interest rates. Inflation in the 17-nation euro region quickened to 2.4% from 2.3% in January. A week ago the ECB warned it may have to increase its base rate as inflation increases. Inflation is the fastest since October 2008 and exceeded the ECB’s 2 percent limit for a third month. Something to watch but at the moment all focus remains on Japan and safety moves into US treasuries continuing to push rates lower.
Treasuries and mortgages continue to improve with increased intraday volatility; the stock market is leading, yesterday the DJIA started down almost 300 points but ended -137 as it climbed out of its hole treasury and mortgage markets lost ground. Market volatility today remains high and must be monitored closely; we will and let you know if price worsening develops as it did yesterday.