Posted by
boxflyz About Econ on Friday, August 24, 2007 12:08:36 PM
Rates are up only slightly this morning, but not nearly as high as they could have been driven. This gives further evidence to the idea that bond markets – specifically traders – have a bias towards the low end of the trading range.
The market opened with news that Durable Goods Orders were a good deal higher than predicted. The expectations ranged from 0.9 to 1.5%. Only one group guessed the 1.5%. The majority were looking for a 1.0% reading. Purchases of 747s, washing machines and all ‘big ticket’ items grew by +5.9% in July.
That should have moved rates by about .050%. The 10-year Treasury was up around +.015% at 4.683% shortly after the market opened.
At 09:00cdt {15:00gmt}, New Home Sales were reported at 870,000. Analysts were guessing the number to be 820,000 to 830,000. Given the importance and uncertainty of the housing sector, this should have been an enormous surprise.
Prices on bonds did slip after the release of New Home Sales, which moved the rate initially up to 4.647%, +.029% in inter-day trading.
From that point on the bond market has roughly tracked with the stock market, but even that track demonstrates investor bias to lower rates. In late morning the 10-year Treasury is +.007% with the rate at 4.625%.
SHORT-TERM OUTLOOK [24 August 2007]
It looks as if a new trading range has emerged. It appears the ceiling is around 4.900%, maybe a 5.000% flat. The floor seems to be just below 4.600%.
Coming Week: August 27 - August 31, 2007 will be busier than this last week. Probably the most volatile item will be at week's end with the Income and Spending report on Friday. Tuesday's Consumer Confidence may cause rates to move, possibly upward.
Monday, August 27, 2007
10:00a.m. July Existing Home Sales. Previous: -3.8%.
10:30a.m. Aug Dallas Fed Mfg Production Index. Previous: -9.7.
Tuesday, August 28, 2007
7:45a.m. ICSC Chain Store Sales Index For Aug 25.
8:55a.m. Redbook Retail Sales Index For Aug 25.
10:00a.m. Aug Conference Board Consumer Confidence. Previous: 112.6.
10:00a.m. Aug Richmond Fed Manufacturing Index. Previous: 4.
5:00p.m. ABC/Wash Post Consumer Conf For Aug 26.
Wednesday, August 29, 2007
There are no economic indicators scheduled for today.
Thursday, August 30, 2007
8:30a.m. Initial Jobless Claims For Aug 25 Wk.
8:30a.m. 2Q GDP, Preliminary. Previous: +3.4%.
8:30a.m. 2Q Corporate Profits, Preliminary. Previous: +1.7%.
10:00a.m. July Help-Wanted Index. Previous: 26.
10:00a.m. DJ-BTMU Business Barometer For Aug 11.
Friday, August 31, 2007
8:30a.m. July Personal Income. Previous: +0.4%.
8:30a.m. July Personal Spending. Previous: +0.1%.
9:45a.m. Aug Chicago PMI. Previous: 53.4.
10:00a.m. End-Aug Reuters/U Of Mich Sentiment Index.
10:00a.m. July Factory Orders. Previous: +0.6%.
MID-TERM OUTLOOK [23 August 2007]
There are some bright spots, and a couple dark spots for rates in the next few months. First, the good news for rates: But, remember, good news for rates often means bad news for the economy.
A.) Investor Sentiment seems to have turned. During most of the 2nd quarter investors seemed to grab onto any news that would increase rates. At the same time, they ignored news that would have lead to lower rates.
On 18 July, FED Chair Ben Bernanke stated he saw evidence that inflation would be lowering in the last ½ of 2007. (He was optimistic for 2008. See Long-term outlook.)
Sentiment on the part of bond investors clearly changed as of 18 July 2007. On that day the 10-year Treasury traded below the recent floor of 5.000%. On the next day, and on 20 July, and Monday 23 July the 10-year Treasury closed below that 5.000%. What is significant about those two days is the complete absence of significant data.
B. Inflation has been encouraging. CPI, PPI and PCE all have been at or bellow expectation. Inflation is the greatest fear for bond investors. Better than forecast inflation numbers have brought investors back in.
C. Consumer Sales numbers have improved over the 2nd quarter, but not in such a dramatic way to threaten inflation.
D. The housing bubble has burst. But, will housing continue to decline? Is it flattening? Or, is it on the verge of a rebound? The data when compared to last year has been mostly negative, but there can always be evidence indicating other directions.
The housing market problems have a way of creating a cycle.
Clearly, the sub-prime mortgage industry was lending money to buyers that could not repay. That has resulted in very high default and foreclosure rates. These problems in the subprime market cause investors to steer money away from the sub-prime lenders. At the same time, there was a lot of housing activity in the years ending in 2004. Eventually this high amount of activity came to an end. All economic events are cyclical and they usually work out this way. But, when the boom ends prices and activity tend to fall off. That is the condition we are in the middle of 2007.
Now, we have the perfect storm. While not the majority, many of the home buyers were those that qualified for the sub-prime mortgages. Now with fewer buyers, the housing market is hurting more. That is causing prices to go lower. That means more foreclosures when problems occur. That means more skitterish nervousness from investors in mortgage instruments. And thus, the cycle continues.
There are also a few concerns for rates in the mid-term and long term:
1.) The US and the global economy are in a recovery. No it is not as booming as it was during Reagan. And it is not as strong as it was after the GOP took over congress in 1994. But the 2.2% Main Stream Media will not report this.
Eventually, it becomes obvious to even the most casual investor and observer. That will move rates higher.
2.) In February this blog commented on one inflation concern: corn prices. The fears were not unfounded, and are still a concern.
LONG-TERM OUTLOOK [14 June 2007
IN the very long term, China has threatened to sell its $900 billion in US bonds. Doubtful they would do it, but it is a bargaining chip.
Steve Boxmeyer [612] 799 – 6858
steve@LendWithIntegrity.com