Russia and Ukraine agreed on steps toward a cease-fire. Ukraine’s President Petro Poroshenko and Russian counterpart Vladimir Putin discussed how to move toward a cease-fire in the contested eastern region. That there are talks underway has taken the safety trade into US treasuries off the table and is sending interest rates up both yesterday and early this morning. Yesterday the 10 yield increased 7 bps and the 30 yr bond up 10 basis points; early this morning the 10 yr up another 3 bps to 2.45% at 8:00 am. Technically all of the bullish readings are now gone, the 10 yr rate above its 20 and 40 day averages with the rate now back to levels in mid-August. MBS prices fell 25 bps yesterday but most of the selling was in treasuries.
In a show of solidarity Pres. Obama is in the Baltics today to assure Baltic states will be protected frm Russia by NATO; the Baltics are in NATO. With Russia making moves in Ukraine, even though talks of a cease fire are increasing; the President flew the big plane into Estonia today to graphically show that NATO will not abandon the Baltics. One more photo op that has led to selling in the treasury markets.
Another be-heading making the headlines in the mid-east although it isn’t showing up in the markets. Obama said U.S. airstrikes have halted the military momentum of Islamic State extremists in Iraq and the next step must be building a regional coalition to close in on them.
Tomorrow the ECB meeting that is expected to announce another QE move; Mario Draghi has been quite vocal recently that the bank will do whatever it takes to pull the EU away frm its deflationary slide. Europe’s stock market rallied today. China data this morning more support for global markets; the non-manufacturing purchasing managers’ index advanced to 54.4 in August from 54.2 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today. A separate services gauge from HSBC Holdings Plc and Markit Economics surged to a 17-month high of 54.1, from 50 in July. Readings above 50 for both gauges mean that activity expanded.
At 9:30 the DJIA opened +66, NASDAQ +11, S&P +6; 10 yr at 2.45% an extremely important technical level (see comment below). MBS prices not too bad at 9:30, -7 bps frm yesterday’s close.
Mortgage applications increased 0.2% from one week earlier, the Refinance Index increased 1.0% from the previous week: the seasonally adjusted Purchase Index decreased 2.0% from one week earlier. The refinance share of mortgage activity increased to 57% of total applications, the highest level since March 2014, from 56% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 7.8 percent of total applications. Housing data released in the last two months continues to paint an abstract picture; some data positive while other measurements not so good. High priced homes selling much better than the entry level homes as millennials remain on the sidelines.
At 10:00; July factory orders were expected to have jumped 10.9%, as reported orders were +10.5%; June orders revised from +1.1% to +1.5%.
The Fed releases its Beige Book, a survey based on reports from the 12 regional banks in the Fed system, at 2 p.m. in Washington. The report will give policy makers clues about the economy before the Fed’s Sept. 16-17 meeting.
2.45% on the 10 yr note is critical technically. We call your focus to the chart above. Note the significance of that level; it acted as a very long term solid resistance until it broke through in mid-August, mostly due to geo-political issues. Now the 10 is back at that level testing it as a key support level. The major momentum oscillators are back to neutral readings; if the 10 can’t hold at these levels look for the rate to increase to move up to 2.57%, the next key support. Friday’s jobs report, Ukraine/Russia are driving trading now. Tomorrow the ECB is widely believed to begin another QE. Looking at global rates in relation to the US bond markets; Germany’s 10 yr bund rate traded at 0.87% recently, today at 0.95%; a s long as the bund yield increases the US 10 will follow it higher.
PRICES @ 10:15 AM
10 yr note:-4/32 (12 bp) 2.44% +2 bp
5 yr note: -1/32 (3 bp) 1.69% unch
2 Yr note: unch 0.53% unch
30 yr bond: -8/32 (25 bp) 3.19% +1 bp
Libor Rates: 1 mo 0.156%; 3 mo 0.233%; 6 mo 0.329%; 1 yr 0.562%
30 yr FNMA 3.5 Sept: @9:30 102.62 -7 bp (-14 bp frm 9:30 yesterday)
15 yr FNMA 3.0 Sept: @9:30 103.50 -3 bp (-4 bp frm 9:30 yesterday)
30 yr GNMA 3.5 Sept: @9:30 103.66 -11 bp (-10 bp frm 9:30 yesterday)
Dollar/Yen: 105.00 -0.09 yen
Dollar/Euro: $1.3144 +$0.0011
Gold: $1266.10 +$1.10
Crude Oil: $94.14 +$1.26
DJIA: 17,137.34 +69.78
NASDAQ: 4598.30 +0.11
S&P 500: 2006.71 +4.43