The anticipated response to Syria was generally as expected. What wasn’t certain was when it would occur; that the US moved on Friday night did take markets out of the equation since no markets were open and it allowed markets to think before those knee-jerk reactions. Opinions running the gamut as would be expected. According to the news wires the missiles destroyed Syria’s chemical weapons facilities. The reaction in markets sent the rate markets up (yields) and prices lower; initially early this morning the 10-yr rate went up to 2.87% +5 bps from Friday and initial prices in MBS markets down 19 bps from Friday’s closes.
At 8:30 am EST markets got March the retail sales figures; finally after 3 months of weakness sales increased 0.6%, stronger than the +0.4% forecasts; excluding auto sales, +0.2% as was expected. Less autos and gasoline, +0.3% on estimates of +0.5%. Year-on-year growth rates for the core readings: down 2 tenths to 3.9 percent ex-gas ex-auto, and down 3 tenths for the control group at 3.8 percent. Good to see some improvements in sales but the year-on-year data is still a concern with consumer spending remaining slower than those very optimistic forecasts when the tax cut bill was signed late last year.
The NY Empire State manufacturing index this morning was expected at 20 from 22.5; the index declined to 16.8. In the past, this report got a lot of ink, but over the last year markets have tended to pay less attention; it is volatile, and NY isn’t known for strong manufacturing companies. On Thursday the wider regional Philadelphia Fed business index carries more focus; presently expected at 201, up from 22.3 in March.
At 10:00 am February business inventories thought to be up 0.6% were the same as Jan; the index reported +0.6%.
Also at 10:00 am the more interesting April NAHB housing market index, forecast at 70 unchanged from March; the index fell to 69, the lowest since last November. The present sales component is down 2 points to a 75 level that is nevertheless very strong, while 6-month sales are at 77 for a 1 point loss. But traffic is not slowing, holding steady at a marginally positive 51. Regional data are very steady and show the West still out in front, at 76, with the South at 72, the Midwest at 64, and the Northeast at 55. The slip in current sales won't be raising expectations for next week's report on new home sales.
Syria is pushed to the back of the line now that the anticipated military response has happened. There will be a lot of discussions at the UN and other international forums, but as far as markets are concerned focus back to trade and the potential implications for economic growth and a return to thinking about the expected Fed rate increases. Over the weekend Nobel Prize winner Robert Shiller (of Case/Shiller fame) warned that stocks are still over-valued even at the current lower levels. Shiller has a track record, having predicted the dot com bubble in 1998 as well as the housing meltdown in 2008. "As of the fourth quarter, real S&P 500 earnings were still below their 2015, if you correct for inflation. So, it's not like we are in this spectacular market," Shiller said this weekend on CNBC. Last week Q1 earnings season began. Not many reporting yet, but what has been reported has been positive; big banks JP Morgan Chase, Citigroup and Wells Fargo reported solid beats against the top and bottom lines, although those stocks sold off as future outlooks are not that good. Market volatility is likely to continue, although we do expect equity markets have more near-term upside than downside.
Technicals are back to bearish in the bond and mortgage markets; the 10-yr is back within its comfort range between 2.80% and 2.90%. No change in markets about increasing interest rates and the belief that tax cuts and infrastructure spending will boost growth this year. Through this week Fed officials will be speaking adding to the optimistic economic view and confirming more interest rate increases. This morning the stock indexes opened firm and still holding gains although the indexes at 10:00 am are trending lower from opening levels. The bond and mortgage markets are doing their thing improving from the low levels of prices as indexes slip a little. It’s a long day, and intraday volatility in equity markets has been the norm.
This Week’s Calendar:
8:30 am March retail sales (expected +0.4%, as reported +0.6%; excluding autos +0.3%)
April NY Empire Sate manufacturing index ( expected at 20 from 22.5 declined to 16.8)
10:00 am April NAHB housing market index (expected at 70 unchanged from March, as reported
Feb business inventories (expected +0.6%, as reported
8:30 am March housing starts and permits( starts estimate +2.3% to 1264K units; permits +2.3% at 1315K units)
9:15 am March industrial production and factory use (production +0.4%, factory use 78.0% from 78.1% in Feb)
7:00 am weekly MBA m mortgage applications
2:00 pm Fed Beige Book release
8:30 am weekly jobless claims (230K -3 K)
April Philadelphia Fed business index (20.1 from 22.3)
10:00 am March leading economic indicators (+0.3% frm +0.6% in Feb)
No scheduled data
PRICES @ 10:00 AM
10 yr note: -6/32 (18 bp) 2.85% +2 bp
5 yr note: -4/32 (12 bp) 2.70% +3 bp
2 Yr note: -2/32 (6 bp) 2.38% +3 bp
30 yr bond: -11/32 (34 bp) 3.05% +3 bp
Libor Rates: 1 mo 1.895%; 3 mo 2.352%; 6 mo 2.490%; 1 yr 2.730%
30 yr FNMA 4.0 May: @9:30 102.13 -14 bp (-6 bp from 9:30 Friday)
15 yr FNMA 3.5: @9:30 101.47 -13 bp (-7 bp from 9:30 Friday)
30 yr GNMA 4.0: @9:30 102.78 -9 bp (+6 bp from 9:30 Friday)
Dollar/Yen: 107.23 -0.11 yen
Dollar/Euro: $1.2388 +$0.0038
Dollar Index: 89.42 -0.41
Gold: $1351.50 +$3.60
Crude Oil: $66.58 -$0.81
DJIA: 24,527.46 +167.32
NASDAQ: 7133.76 +27.11
S&P 500: 2671.91 +15.61