After flirting with 3% yesterday the 10-year Treasury finally pushed through in overnight trading peaking at 3.03%. Currently the yield is 3.01% as we write, down 3/32nds in price. As one might expect, the overnight move was accompanied by elevated volumes but not any fundamental drivers. In fact, the move from 2.75% on April 11 to 3.00% today has been primarily technical in nature rather than fundamentally-driven but that doesn’t negate the move. While the round 3.00% number is the focus of the financial press, the more important support is 3.047% which is the yield peak from January 2014. A breach of that support could put 3.25% in play quickly, but that’s not what we are expecting. The lack of fundamental drivers to the move, and the extent of the move without a material consolidation should provide some solid barriers to a continued move higher in yields. In addition, the elevated volumes from overnight prove the two-way nature of the trading. That is, buyers are stepping in now that a 3%-handle on the 10-year is a reality rather than the trade being a one-sided deluge of sell orders sending yields ever higher. Given the nature of the trade, we would be surprised to not see at least a consolidative rally that pushes yields back under 3.00% in the near-term. In any event, with nothing on the economic calendar (save a 5-year Treasury auction), expect investor and financial news focus to be on the 3% 10-year. Thus, the trading action around 3% will be instructive, so remember that 3.047% January 2014 support level.
|Economic News||More Americans Planning to Buy Homes||Agency Indications|
As mentioned above, while the psychologically important 3.00% level has been breached, the more important support actually reaches up to 3.047%. Breaking that, however, could put 3.25% in play in short order. But for now it seems like the tentative move over 3% is being met with buyers rather than capitulation by sellers. That means there is still resistance to the idea of excessive growth, runaway inflation, etc., that would necessitate a new, materially higher trading range.
As noted, the move from a 2.75% 10-year yield on April 11 to 3% not quite two weeks later has come about without any underlying fundamental economic change. Rather it seems the selling was inspired by Fed speak that has exuded more confidence in its inflation outlook, and that confidence is pressuring short-term rates and giving investors reason to pause even further out the curve. Repricing from three hikes in 2018 and 2019 to a four hike scenario in both years invites some selling, and add in supply concerns that are amplified by this week’s auctions of 2yr, 5yr and 7yr notes and the necessary ingredients for some selling seem to have been met.
If we had a true acceleration of demand-side inflation, boosted by accelerating wage gains, then the recent gains in commodity prices (namely oil) and other supply-side cost increases could spark a more spirited back up in rates. As it is, the recent commodity price increases look to be more a PPI matter that is finding it hard to jump into CPI numbers. That means producers are absorbing, to a great degree, wholesale price increases that crimp profit margins more than anything else. Also, while there have been anecdotal reports from the Fed’s Beige Book of wage pressures in certain fields, the monthly jobs report still fails to show anything more than 2.5%-2.7% wage gains on an annualized basis and that’s far from sparking a demand-push price spike.
In the end, the latest move to 3% has been more about the Fed insisting inflation is returning to 2% with rate hikes continuing at least through 2019. However, to make the move to 3% sustainable and long-lived, inflation, growth, and wage gains will have to become more pronounced. But then, we ask how pronounced those drivers can become with a Fed that appears hyper-sensitive to inflation and not wanting to appear behind the curve?
While the Treasury market largely ignored the economic releases yesterday, most beat expectations. New homes sales came in higher-than-expected at 694,000 in March versus 667,000 in February and well above the 630,000 consensus. The +4.0% monthly gain occurred on top of February's impressive+3.6% gain. While the new home sales market is only about 10% of the residential market it does provide a wide boost to the economy given the construction and other trades and materials involved in the process.
Also the Conference Board reported that consumer confidence rose in April to the second-highest level since 2000 beating expectations as Americans grew more upbeat about both current conditions and the economic outlook. The Confidence index rose to 128.7 versus 126 expected and it also beat the lofty 127 reading in March. A bigger share of respondents expect to purchase big-ticket items including cars and major appliances within six months, while a record 7.8% of respondents said they plan to buy a home. That will support both consumer spending, the biggest part of the economy, as well as housing prices that are already handily outpacing wage gains amid tight supplies.
At the same time the report showed the labor differential—the gap between respondents saying jobs are plentiful and those who say they’re hard to get—narrowed to 22.9%, a three-month low, versus 23.8% prior. The latest results contrast with other signs that consumer and business confidence measures, while still fairly high, are coming off the lofty levels seen in the past year. In the end, while the various confidence readings are important findings, we’ve found it more beneficial to watch what consumers do more so than what they say.
More Americans Planning to Buy Homes
Based on the latest Conference Board survey of American consumers they are getting more bullish on the housing market despite rising mortgage rates, tight supply and prices that are creeping higher. The share of Americans who plan to buy a home in the next six months rose to a record 7.8%, as shown in the accompanying graph. That number had fallen below 2% in 2009. While increased home purchases would surely be a boost to the economy it also remains to be seen if the plans turn into reality. In any event, despite higher rates and uncertainty creeping into equity markets, American consumers appear to be a confident bunch with big plans down the road.
Agency Indications — FNMA / FHLMC Callable Rates