Weekly Review Here is the week’s review of the news that affected the financial markets during this past week. Monday… stocks fell from the Open and struggled to rebound back to break even while bonds opened higher and then faded from peak highs as the session wore on. The 10-year Treasury note yield crept higher by a basis point to reach 2.47%. There were no noteworthy economic reports released today and this news vacuum may also have contributed to the somewhat directionless market today. Tomorrow will also be a light day for economic news so we may see more lackluster market action. In economic news, the Federal Reserve released the Consumer Credit report for July showing consumer credit increased by $26.0 billion. This was higher than the consensus estimate of $17.40 billion, plus the prior months credit growth was revised upward to $18.8 billion from $17.3 billion. For the session, the yield on the 10-year Treasury traded 1.3 basis points higher to yield 2.47% while the FNMA 30-year 3.5% coupon bond lost 1.6 basis points to close at $102.61. For stocks, the Nasdaq Composite Index gained 9.39 points to end at 4,592.29. The Dow Jones Industrial Average fell 25.94 points to close at 17,111.42. The S&P 500 Index dropped 6.17 points to finish at 2,001.54. Tuesday… an absence of tradable news drove stock and bond prices lower and bond yields higher during a choppy trading session. Bond prices are also lower with higher yields across Europe. Perhaps traders are unwilling to commit to any significant moves and are sitting on their hands until the passage of the anniversary of September 11 when Islamic extremists try to pull off spectacular terrorist attacks. In economic news, the Job Openings and Labor Turnover Survey for July indicated job opening fell to 4.673 million from 4.675 million. Confidence among small-business owners edged higher in August as improved capital-spending plans offset a weakening in hiring plans, according to a report released by the National Federation of Independent Business (NFIB). The NFIBs small-business optimism index rose to 96.1 in August from 95.7 in July and 95.0 in June. Economists surveyed by The Wall Street Journal had expected an increase to 96.0. However, the NFIB downplayed the indexs gain, stating the reading remains well short of typical levels seen in times of economic expansion. Augusts sub-indexes were mixed with the proportion of small-business owners who view now as a good time to expand declining by one point to 9%. Although the expected business conditions index improved to -3%, the negative reading means there are still more owners who see business conditions worsening over the next six months than those who see conditions improving. For the session, the yield on the 10-year Treasury traded 3.1 basis points higher to yield 2.50% while the FNMA 30-year 3.5% coupon bond lost 19.25 basis points following a 37 basis point coupon rollover re-pricing to close at $102.05. For stocks, the Nasdaq Composite Index lost 40.00 points to end at 4,552.29. The Dow Jones Industrial Average fell 97.55 points to close at 17,013.87. The S&P 500 Index dropped 13.10 points to finish at 1,988.44. Wednesday… was another day where there was little tradable geopolitical and economic news. Bond prices fell with yields rising while equities worked marginally higher. In economic news, the Mortgage Bankers Association released their Weekly Mortgage Applications Survey for the week ending September 5. The report was disappointing to the mortgage industry. The Market Composite Index measuring mortgage loan application volume fell 7.2% from the prior week, to the lowest level since December 2000. The Refinance Index dropped 11% percent from the prior week, to the lowest level since November 2008. The seasonally adjusted Purchase Index fell 3% from one week earlier, to the lowest level since February 2014. The unadjusted Purchase Index dropped 14% compared to the previous week and was 12% lower than the same week one year ago. The refinance portion of mortgage activity fell to 55% of total applications from 57% the prior week. The adjustable-rate mortgage (ARM) share of activity dropped to 7.5% of total applications from 7.8% the prior week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 4.27% from 4.25 percent with points increasing to 0.25 from 0.24. Wholesale Inventories reportedly increased 0.1% in July following a downwardly revised 0.2% increase in June. The consensus estimate called for an increase of 0.5%. The Treasury reopened a $21 billion auction of 10-year notes drawing 2.535% with an average 2.71 bid to cover ratio. A strong 53.0% indirect takedown helped offset a weak direct 13.5% bid. Primary dealers ended up with 33.5% of the supply. The results were in-line with expectations, and the 10-year Treasury note held near session lows immediately following the auction. At the close, the yield on the 10-year Treasury traded 4.1 basis points higher to yield 2.54% while the FNMA 30-year 3.5% coupon bond lost 21.9 basis points to close at $101.83. For stocks, the Nasdaq Composite Index gained 34.23 points to end at 4,586.52. The Dow Jones Industrial Average advanced 54.84 points to close at 17,068.71. The S&P 500 Index added 7.25 points to finish at 1,995.69. Thursday… U.S. equities opened lower this morning and bonds a little higher, but stocks have since found some stability with the Russell 2000 and S&P 500 finishing in positive territory. Mortgage bonds faded from their best levels when stocks firmed near technical support levels, most notably the Dow Jones Industrial Average and the S&P 500 bouncing higher from their 25-day moving averages. Meanwhile, the yield on the 10-year Treasury bounced higher off of its 100-day moving average located at 2.53%. Technically, the stock market continues to consolidate from stretched valuations and concerns about economic weakness in areas of Europe and military conflicts in Ukraine and the Middle East while bond prices slowly trend lower with higher yields. Traders continued to receive limited economic news today. Weekly Initial Jobless Claims increased to 315,000, while economists were looking for 300,000 claims. The prior week’s claims were revised higher to 304,000 from 302,000. Continuing Jobless Claims were in line with expectations. There was little response in the Treasury market to the jobless claims data. The Treasury reopened $13 billion in 30-year bonds in a strong auction that drew a yield of 3.240% with a solid 2.67 bid to cover ratio. Both indirect and direct bids at 45.5% and 21.8% of supply respectively were strong, leaving primary dealers with just 32.7% of the supply. Treasury yields briefly moved lower in response to the auction then moved higher. For the session, the yield on the 10-year Treasury traded 1.0 basis point higher to yield 2.55% while the FNMA 30-year 3.5% coupon bond lost 6.3 basis points to close at $101.77. For stocks, the Nasdaq Composite Index added 5.29 points to end at 4,591.81. The Dow Jones Industrial Average lost 19.71 points to close at 17,049.00. The S&P 500 Index traded 1.76 points higher to end at 1,997.45. Friday… stocks and bonds both moved lower from the open and continued lower as the session unfolded. The busiest economic news day for the week included two encouraging reports on the U.S. economy, one of which is known to be closely examined by the Federal Reserve. The Commerce Department reported Retail Sales in August increased by 0.6% and also upwardly revised their July Retail Sales estimate from 0.0% to growth of 0.3%. This report suggests consumers, who are a critical component of the nation’s economy, are feeling more optimistic these days. In fact, the latest reading on consumer sentiment showed sentiment rising to 84.6 in September from 82.5 in August. This could also be a good sign as the holiday shopping season approaches. Business Inventories for July were also reported with inventories increasing by 0.4%. Inventory growth is viewed as a useful barometer of business sentiment. When companies increase their inventories they are usually optimistic about future demand and this should be a favorable growth indicator for the U.S. economy over the final three months of 2014. Having said this, today’s favorable economic news may actually be bad news for Wall Street. We have commented before that good economic news may be bad news for investors in the current investing climate because it could prompt the Fed to reconsider moving up its timeline for raising interest rates. A reduction in accommodative policies is typically not viewed favorably by equity and bond market investors and we would expect that to be the case once more. The bond market in particular could be very sensitive to an interest rate hike. The next rate decision will be announced next Wednesday by the Federal Open Market Committee (FOMC). If the FOMC even slightly alters its post-meeting commentary to suggest it may possibly raise rates earlier than expected, it could trigger reactive selling on Wall Street. The 10-year Treasury note yield now sits at 2.61%, 22 basis points higher since Thursday, September 4 when the European Central Bank announced more policy stimulus. However, there are bond analysts that believe the recent rise in yield reflects underlying concerns about the Treasury market being behind the Fed in terms of the timing of the first interest rate hike. For Friday’s session, the yield on the 10-year Treasury traded 5.8 basis points higher to yield 2.61% while the FNMA 30-year 3.5% coupon bond traded 29.7 basis points lower to close at $101.47. For stocks, the Nasdaq Composite Index lost 24.21points to end at 4,567.60. The Dow Jones Industrial Average dropped 61.49 points to close at 16,987.51. The S&P 500 Index fell 11.91 points to finish at 1,985.54. For the week, the FNMA 3.5% coupon bond lost 115.6 basis points to end at $101.47 while the 10-year Treasury yield gained 15 basis points to reach 2.61%. Stocks ended with the Dow Jones Industrial Average losing 148.68 points, the S&P 500 dropping 22.05 points, and the NASDAQ Composite falling 15.17 points. Year to date for 2014, the Dow Jones Industrial Average has gained 2.42%, the S&P 500 has gained 6.91%, and the NASDAQ Composite has gained 8.56%. The national average 30-year mortgage rate rose from 4.15% to 4.24% while 15-year mortgage rates increased from 3.31% to 3.39%. FHA 30-year rates held steady at 3.75% and Jumbo 30-year rates increased from 4.03% to 4.10%. Mortgage Rate Forecast..... The FNMA 3.5% coupon bond ($101.47, -30bp) plunged lower this past week following the appearance of a bearish “shooting star” candlestick on Friday, September 5. In fact, the bond has trended lower since a small “shooting star” candlestick appeared with a sell signal generated from a negative stochastic crossover on August 29. Other bearish signs this past week included the formation of a “falling window” or downward gap last Wednesday and the completion of a two-day “bearish engulfing lines” pattern last Thursday. This technical damage plunged the bond below multiple support levels for a test of support at the 200-day moving average at $101.42. If this level fails to hold, the next level of support is located at the 61.8% Fibonacci retracement level at $101.32. The bond is now severely “oversold” with the stochastic oscillator sitting at an extreme low with the %K line reading a value of zero. The last time we saw such an extreme reading of zero was on December 5, 2013 and the bond continued to fall another 46 basis points before turning higher. If this same scenario plays out this coming week, we could see bond prices and mortgage rates continue to worsen before we see them improve for the better. Market speculation that the Fed will take a more hawkish tone at next Wednesday’s FOMC meeting could continue to weigh on the bond market early next week. Economic Calendar - for the Week of September 15 The economic calendar features releases on manufacturing, housing, and measures of inflation, but investors will give their undivided attention to Wednesday’s interest rate decision and monetary policy commentary from the Federal Reserve’s Federal Open Market Committee.
Posted on: Mon, 15 Sep 2014 17:38:27 +0000
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