Interest Rate Roundup

Monday, July 31, 2006

deep thoughts about deepening inversion

What's wrong with the yield curve? It's inverted, that's what. And not just a little bit. At 5.25%, the federal funds rate is the highest rate on the curve and some maturities (like the five year note) are on fire. 5-year yields are now 4.91%, almost 35 basis points below fed funds.

Interestingly, long bond yields are not falling as far -- at 5.07%, they're above yields in the middle part of the curve. That's worth noting as it could signal that there is still some longer-term inflation concern out there (even if the short-term to mid-term focus has shifted to growth worries).

Friday, July 28, 2006

Home vacancy rate at highest level ever

It's an obscure stat, but one that's important nonetheless: The homeowner VACANCY rate hit 2.2% in the second quarter, the highest in U.S. history (the Census Bureau has been tracking since 1956).

This is the result of all the real estate speculation. In short, too many homes were built for too many speculators who never intended to live in them. Now, there's a massive supply glut of residential units. It's also one reason I'm skeptical the recent surge in apartment rents will last.

Too many of these speculators will not be able to sell, so they're going to have to rent instead. Put another way, while there hasn't been a big rise in the construction of traditional apartment buildings, the overall housing stock (including single-family and townhomes) has skyrocketed. Some food for thought given the fact apartment Real Estate Investment Trusts (REITS) have been so hot lately.

Thursday, July 27, 2006

Mortgage stocks getting shredded

I've been following the housing and mortgage industries for years. Just today, a major meltdown is unfolding in the big mortgage stocks. Don't know why, but several are tanking on super-heavy volume (CFC is one example). Credit worries? Dismal home sales? Stricter mortgage regulation? I don't know, but this is weird market action.

New housing sales still weak

The new home sales report for June was released today. More of the same: More inventory ... fewer sales ... less price growth. Specifically, sales were down 11.1% year-over-year and inventory surged to a fresh all-time record of 566,000 units. The median price of a new home rose 2.3% YOY, the slowest rate of growth since December 2003. I'm expecting negative readings very soon given all the discounting, undercutting, and all-out desperation in the new home market.

As for interest rates, the snoozefest continues. Rates have basically gone nowhere the past several days.

Tuesday, July 25, 2006

Good to be back...

Sorry I haven't posted in a little while. I've been crazy busy with lots of projects and issues. Some quick thoughts to get you caught up:

* Interest rates are flat-lining here at just over 5% across the maturity spectrum. Not a lot of major data out until the July jobs report (August 4). The next non-economic catalyst for a big move is the Fed's policy meeting on August 8. I'm still leaning toward another hike.

* Existing home sales numbers just out for June stink. According to the National Association of Realtors, sales dropped almost 9% year-over-year, inventory for sale skyrocketed 39% to a record 3.73 million units, and prices are starting to fall. NATIONWIDE median condo and co-op prices dropped 2.1% from June 2005. Single family home prices DID rise, leading to a market-wide increase of an ever so slight 0.9%. But that was the smallest gain in 11 years. And here’s the catch: Those are NOMINAL prices, not REAL (or inflation adjusted) ones. The Consumer Price Index overall gained 4.3% in June. So when you factor in inflation, the average home lost 3.4% in value.

* Stock investors in general trading off the "soft landing" economic theory here, in my view. In their world, inflation pressures are gently easing, growth is gradually decelerating, but profits are fine, housing will just cool without any major loan trouble and/or defaults, the Fed is perfect, and life is beautiful. Sounds completely logical, doesn't it? (he says, sarcasm dripping from his toothy maw!)

Wednesday, July 19, 2006

Bernanke says "Party on, Dude!"

Actually, in the movie Bill & Ted's Excellent Adventure, it was Abraham Lincoln who uttered those famous words. But who's keeping track right? The fact is, despite a nasty Consumer Price Index report this morning (core CPI up 0.3% MOM and 2.6% YOY, the worst inflation rate since early 2002), Ben told the market what it wanted to hear -- that inflation is a lagging indicator, that the economy is going to slow, but not too much, that everything will be perfect, rosy and wonderful forever and ever.

Color me skeptical. This is about the 10th "Fed is done" rally in the past year. Maybe the Fed has finished, maybe it hasn't (I'm still in the "hasn't" camp). But the question we should be asking ourselves is "Why does the Fed -- and Bernanke -- have ANY credibility left?"

Tuesday, July 18, 2006

NAHB index plunges again

The July index from the National Association of Home Builders just came out. This is the index that measures current sales, buyer traffic and expectations for future market activity. All components plunged AGAIN. At 39, the index has now taken out its lows from the 94-95 rate hiking cycle, and is at the lowest level since December 1991 -- more than 14 years ago. Ugly. Ugly. Ugly. And remember, this is a JULY number, so it's very up to date.

PPI hotter than expected

We just got the second of three monthly inflation reports. The Producer Price Index, or PPI, gained 0.5% in June, more than the 0.3% forecast by economists. YOY wholesale inflation is now running at just under 5%. So-called "core" PPI was up 0.2% on the month, in line with expectations. But even the core PPI is now up 1.9% YOY, up from 1.4% at the start of the year.

Bonds not liking the numbers in the early going, with 10-year Treasury Note futures recently down 10.5 ticks.

Monday, July 17, 2006


That's a lot of acronyms to digest this early on a Monday morning, I know. LOL!

But to sum up: Both industrial production (IP) and capacity utilization (CAP-U) were better than expected (BTE). IP was up 0.8% in June, double the consensus forecast from The CAP-U reading was 82.4%, much higher than the 81.9% forecast. Coming in the same week as the producer price index, consumer price index, and Ben Bernanke's testimony on the economy, these numbers should hit bonds (send prices lower, rates higher). The production figure helps alleviate some of the market's growth concerns, while the higher rate of capacity utilization implies more inflationary pressure.

Friday, July 14, 2006

Desperate home builders ... Desperate measures

The second-largest home builder in the country, D.R. Horton, just issued one heck of an earnings warning. All the building shares are getting trashed as a result. I've been talking about just how much trouble these guys were in across several venues.

Then today, I stumbled across a print version of this Lennar Corp. web advertisement in the Palm Beach Post. Smacks of serious desperation to me. Check out the "Any reasonable offer will be accepted" line. Yikes!

1 of 3 inflation reports down

Import/export price data was released for June today. Some details:

Overall prices were up just 0.1% after a 1.7% rise in May. But in June, oil and gas prices were at their recent low. Since then, they've surged. So July should look worse on the headline.

A "core" number in the report -- “non-fuel import prices” -- surged 0.7% in June. That tied May's rise, which was the highest going back to 2002.

All of that said, bonds are flat to slightly up on weaker retail sales figures for June and weak consumer confidence. We've seen a battle royale between growth and inflation in the past several days. The growth figures ... and stocks ... have been weak. The inflation figures have been strong, as has oil. Who will win out? We'll see...

Tuesday, July 11, 2006

Some thoughts on construction stocks

I follow lots of interest sensitive stocks, especially the home builders. Lately, I've also been focusing my attention on the construction suppliers and home improvement retailers. Many are already getting whacked, but I think there could be more downside ahead.

Marketwatch picked up an article I wrote on the topic; if you're interested in reading it, follow this link:

Friday, July 07, 2006

Catching the turning point

I haven't been shy here talking about why rates should continue to rise for now, both here and abroad. But let's state the obvious: They won't rise forever. Long-term Treasuries will EVENTUALLY be a "buy." Inflation will eventually cool and the broad economy will eventually slow.

So how do you catch that turning point? How do you know when we've tipped from an "easy money/ever expanding liquidity/higher inflation" environment to a "tight money/contracting liquidity/deflation" environment? I wish it were easy. But it's not like someone rings a bell. Some key indicators I watch:

* Economic data -- particularly the higher frequency stuff like weekly jobless claims and money supply growth figures.

* Risk spreads -- The spread over Treasuries of high-yield bonds, subrpime mortgage bonds, etc. Are they blowing out, indicating a reduced appetite for risk?

* Stock and commodity prices -- Are these pulling back? If so, it could be a leading indicator of cooling price pressures.

* Chart patterns -- Are we seeing double tops in Treasury yield charts? Are the weekly downtrends in long bond futures or Eurodollar futures turning up?

So far, nothing convincing on any of these fronts. But you can bet I'm watching.

Wednesday, July 05, 2006

Post-Fed, Post-Holiday thoughts

So the big, bad Fed meeting is out of the way. By now, you should know the Fed hiked short-term rates by 25 basis points, but sounded "dovish" in its post-meeting statement. Specifically, it did not commit in advance to more interest rate hikes. The market promptly through an easy money party.

But now that the 4th of July is behind us, it looks like the market is suffering from the same kind of hangover revelers are. Reason: Fears of looming rate hikes overseas (particularly in Japan) and a blockbuster ADP employment report this morning. It suggests the official June jobs report that'll be released on Friday will be much stronger than the market expected. Indeed, Treasuries have just about given back their entire post-Fed rally.

Gotta love the "one and done" crowd. They keep beating their head against that same wall. But despite all the pain, they insist on coming back on CNBC to proclaim the end of the Fed rate hiking cycle. Sigh. Time for an ice pack, anyone?

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