Even before 8:30 AM ET data, the bond, and mortgage markets were under pressure after yesterday’s strong price gains, although most investors didn’t pass on the gains. Investors are now having to face higher borrowing costs after the Fed increased the federal funds rate 0.25% yesterday and bank prime increased to 4.50% from 4.25%. 10 yr. remains tethered in its narrow long-lasting range and keeping mortgage rates generally unchanged for almost three months now.
8:30 data much stronger than forecasts. November retail sales were expected up 0.3%, sales increased 0.8%; excluding auto sales markets were expected +0.7%, as reported +1.0%. October retail sales revised from +0.2% to +0.5%, ex-autos revised from 0.1% to +0.4%. Most major components outside of autos show gains including a 2.5% jump in non-store sales and unusual strength in e-commerce. Electronics & appliances appear to be early holiday favorites with these stores reporting a 2.1% jump on top of a 1.2% rise in October.
November import prices were thought to be +0.7%, as reported prices, were in line +0.7%; November export prices: estimates were +0.3%, as reported +0.5%. Yr./yr. import prices +3.1%, yr./yr. exports also +3.1%.
Weekly jobless claims were estimated up 3K to 239K, as reported claims declined 11K to 225K; even the Puerto Rico claims didn’t impact the totals as jobs continue to increase. If this isn’t full employment, not sure what the definition is. Until now, in history at 4.0% unemployment was considered full economic employment. Now Janet Yellen and the FOMC are expecting more job gains; if that occurs, wages will spike as job competition heats up even more. The 4-week average of claims declined to 234.75K from 241.50K the prior week.
Budget director Mick Mulvaney said today he expects a completed tax bill vote by next Tuesday or Wednesday. He made the comment on CNBC this morning. There is no finalized version yet, but most of the key differences between the House and Senate appear to have been worked out. No Democrat will vote for it in the House or Senate, but that is expected. No Republican voted for Obamacare. Two political parties so far apart on everything; it’s a fight now for next year’s elections.
At 9:45, the composite Flash PMI index: an early estimate of current private sector output by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. The flash data is released 10 days ahead of the final report and is typically based upon around 85% of the full survey sample. The index at 53.0 from 54.6.
At 10:00 October business inventories were estimated -0.1%; as released -0.1%; only the second time this year inventories declined.
The ECB increased its economic growth forecast from 1.8% to 2.3%, but stuck to its pledge to provide stimulus for as long as needed, predicting inflation would remain below target into 2020. The central bank kept its interest rates unchanged. “All in all, the revision of the macroeconomic projections is going in the right direction,” ECB President Mario Draghi told a news conference, noting that subdued wage growth suggested an “ample” degree of stimulus was still required.
Nothing has changed; a nice move better yesterday taking the 10 yr. from 2.42% early yesterday morning to 2.35% at yesterday’s close. It remains in its comfort range between 2.30% and 2.40%. MBS prices and mortgage rates also tied into a tight narrow range for mortgage interest rates. Technically, as long as the ranges stay intact, the bond and mortgage markets can best be described as neutral, neither bullish nor bearish. Fundamentally, inflation isn’t increasing, and yesterday the Fed’s own data suggested inflation isn’t going to increase much in 2018, from 1.7% in 2017 to 1.9% in 2018 and not until 2019 increasing to 2.0%.
PRICES @ 10:00 AM
10 yr note: -9/32 (28 bp) 2.37% +2 bp
5 yr note: -6/32 (18 bp) 2.15% +4 bp
2 Yr note: -2/32 (6 bp) 1.81% +3 bp
30 yr bond: -11/32 (34 bp) 2.74% +2 bp
Libor Rates: 1 mo 1.477%; 3 mo 1.588%; 6 mo 1.755%; 1 yr 2.038%
30 yr FNMA 3.5 Jan: @9:30 102.69 -12 bp (+10 bp from 9:30 yesterday)
15 yr FNMA 3.0: @9:30 102.02 -9 bp (+5 bp from 9:30 yesterday)
30 yr GNMA 3.5: @9:30 103.59 -11 bp (+5 bp from 9:30 yesterday)
Dollar/Yen: 112.62 +0.08 yen
Dollar/Euro: $1.1803 -$0.0024
Dollar Index: 93.57 +0.11
Gold: $1254.40 +$5.80
Crude Oil: 56.36 -$0.24
DJIA: 24,635.81 +50.38
NASDAQ: 6887.44 +11.64
S&P 500: 2666.22 +3.37