Fixed income exhibited real weakness today. Benchmark yields were notably higher, interest rate options volatility ticked up yet again, "rate sheet influential MBS" prices fell 23 ticks to 99-02 (lenders repriced for the worse), NYMEX Crude finally closed over $60, stocks broke all sorts of resistance levels (in decent summer volume), and the dollar took a beating against the Euro. Ugh...all bad indications of the bulls giving up ground to the bears (well bulls and bears in our perspective...we want lower mortgage rates!).
In the past three days the 2s vs. 10s are 20 bps steeper...
(hmm you see resistance there?)
The 10 yr TSY is 35bps higher in the last three days.....with the next possible bounce expected at 3.63...then 3.70. Sign of weakness in 10 yr: 975,000 contracts were traded (875 at 3pm book close)...thats high volume...signaling strength in the sell off!!!
(Note: I use futures contract prices for technical analysis. However, in an effort to keep consistency on the blog, I will overlay retracement levels on corresponding yields. Same difference really)
The FN 4.5 MBS coupon is almost 2 points off its recent 101-00 July 8 high....if rate sheets were moving in step with MBS prices, YSP (base pricing + SRP!!!!) would be 193bps worse.
After starting to show signs of improvement, the dollar (re)lost traction against the Euro....
Oil prices managed to close over $60...something that has yet to occur as stocks have gained momentum over the past week...ugh this is snowballing.
....and the S&P broke 905, 912, 919, 927, and closed over 930. Next MAJOR resistance is near 950.
The technical reasoning behind this rise in interest rates can be explained by volatility in the interest rate options market. I discussed this recent rise in volatility in MBS MORNING. If you missed it, read it! The fundamentals (perceived fundamentals that is) behind this rapidly shifting sentiment....better than expected earnings!
That said....with stocks seemingly unstoppable, we are now forced to considering whether a better than expected earnings season will evolve into the rebirth of the "green shoots" recovery theory...you remember that theory right? You know...the one that sent the S&P on a three month, three hundred point rally off March lows? Are fundamentals currently strong enough to support continued optimism in equities?
Lets see what the Fed says....
Excerpts taken from the text of the June FOMC minutes...
Negative: "The information reviewed at the June 23-24 meeting suggested that the economy remained very weak, though declines in activity seemed to be lessening. Employment was still falling, and manufacturers had cut production further in response to excess inventories and soft demand"
Positive: "But the reductions in employment and industrial production had slowed somewhat, consumer spending appeared to be holding reasonably steady after shrinking in the second half of 2008, and sales and construction of single-family homes had apparently flattened out"
Negative: "The demand for labor weakened further in May, albeit less rapidly than in earlier months"
Positive: "Despite the ongoing decline in employment, real disposable personal income rose in the first quarter and posted another sizable gain in April as various provisions of the American Recovery and Reinvestment Act of 2009 boosted transfer payments and reduced personal taxes. "
Negative: "Consumer spending appeared no longer to be declining but nonetheless remained weak. The continued sluggishness in consumer expenditures mainly reflected falling employment, sharply lower wealth as a result of earlier steep declines in asset prices, and tight credit conditions. "
Positive: "Increases in equity prices had favorable effects on household wealth and overall sentiment"
Negative: "Given the significant uncertainties in the economic outlook, a sizeable reduction in the saving rate seemed unlikely in the near term; some saw the possibility of further increases in the household saving rate."
Positive: "Many businesses had been successful in working down inventories of unsold goods. Some participants noted that, as this process continues, increases in sales will have to be met by increases in production, which would, in turn, support growth in hours worked and eventually in investment outlays"
Negative: "The large number of people working part time for economic reasons and the prevalence of permanent job reductions rather than temporary layoffs suggested that labor market conditions were even more difficult than indicated by the unemployment rate."
Positive: "participants generally judged that, while U.S. output would probably begin to grow again in the second half of the year, the rate of increase was likely to be relatively slow. Most believed that downside risks to economic growth had diminished somewhat since the April meeting, but were still significant."
Negative: "With the recovery projected to be rather sluggish, most participants anticipated that the employment situation was likely to be downbeat for some time"
AND LASTLY...MY FAVORITE:
"Indicators of single-family starts and sales suggested that housing activity may be leveling out, but most participants viewed the sector as still vulnerable to further weakness. Some expressed concern that the increases in mortgage rates seen over the intermeeting period had the potential to further depress the demand for housing and thus impede an economic recovery. Others noted that foreclosures were continuing at a very high rate and could push house prices down further and add to inventories of unsold homes, holding back housing activity and weighing on household wealth."
WHAT DO YOU SAY ABOUT CURRENT MARKET FUNDAMENTALS?
We say market fundamentals are still weak. Earnings reports reflect cost cutting, inventory liquidation,mark to market, other indirect government subsidies (for instance Goldman's UW revenues...did that have anything to do with the Treasury Department requiring 10 banks to issue $70 billion in common equity through public offerings after the government "stress tests"???), record low borrowing costs for money center banks, COST CUTTING again. Even the Federal Reserve is UNCERTAIN ABOUT THE ECONOMIC OUTLOOK. So how can market fundamentals be strong???
THEY ARENT...ITS A TRADERS MARKET....TECHNICAL TRADING STRATEGIES DOMINATE MONEY FLOWS!!! The ups and downs of the stock market are currently not based on "fundamentals", they are based on the perception of fundamentals as they relate to the current position of technical indicators. Market participants havent been/wont be fighting momentum in the stock market. The last thing anyone wants to do is get in the way of that momentum...so market participants either join in the fun and ride the profit train as long as it'll take em, or they wait it out in cash.
Is the recent stock market rally over? Will 927 pull stocks lower or will the S&P test 950? Are stocks overbought? Is it time to go short? Are bonds oversold? Is it time to buy cheap MBS?
Dont know...it depends on whether or not the position of the market's technicals align with the timing of the market "fundamentals".Its a traders world, we're just living in it.
Jobless Claims, Net Capital Flows, NAHB Housing Index, Philly Fed, JP, and more on CIT in the AM.
PS The VIX says its time for a trend reversal...just like it did in late June, just like it did in early July.
PPS...Tomorrow we will be posting a new poll. If you havent already voiced your opinion on the HVCC Moratorium. Voice It Now!!! It's to your right ---->
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