Home Prices: Consumer Confidence

The Day Ahead: Home Prices, Treasury Auction,

Consumer Confidence

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Competing debt ceiling action plans have led to stagnation in Washington and slowly rising interest rates. There has however been little conviction in the move higher as global investors remain wary of underlying economic weakness.

The benchmark 10-year Treasury yield is 1.8bps higher at 3.023% while the two-year is steady with a 0.408% yield and the 30-year yield is up 1.7bps at 4.335%. The steeper yield curve and lack of trading conviction in the bond market is not helping mortgages. The Fannie Mae 4.0 MBS coupon is near its lowest level of the month, currently -2/32 at 100-10.

"Talks between Republicans and Democrats may have fallen apart last Friday, but a detailed outline of their discussions shows how close they came to a deal that would have reset the US tax system and had big implications for corporate America," said an optimistic Financial Times article Tuesday. "Whatever is done to raise the debt ceiling in the short term those months of discussions are likely to provide the framework for any ultimate deal to tackle the US fiscal deficit."

In Europe, Spanish, Greek, and Italian debt spreads are tighter after moving wider Monday.

Equities are broadly lower in Europe but the S&P 500 looks to open 3 points higher at 1,336.50 and Dow futures are up 26 points at 12,576.

Weak GDP in Britain is one reason equities are lower in Europe, as austerity measures appear to be capping growth.

"With the U.K. continuing to struggle with the situation of weak growth and above-target inflation, the first read on Q2 GDP indicated growth remained on the mild side, with the economy expanding 0.2% from the first quarter," said economists at BMO Capital Markets.

Light crude oil rose 0.53% overnight to $99.73 per barrel, while COMEX gold prices fell 0.06% to $1,611.10 per ounce.

Key Events Today:

Tuesday:

9:00 - The S&P Case-Shiller Home Price Index is expected to post another gain thanks to seasonal boosts. Economists expect the index of 20 metropolitan home prices to rise 0.6% in May. That would put prices at 4.7% lower from the same level last year.

"Even though lower mortgage rates in recent months have improved homes' affordability, [the] supply and demand imbalance is a catalyst for further declines in home prices, which we see as likely to persist into 2012 at this point," said economists at Janney Capital Markets.

"The months' supply of existing homes up for sale remains even worse than in late 2010 and well worse than we had anticipated, suggesting that the price situation will continue to deteriorate well before it improves," they added. "Even the creator of the index, Robert Schiller himself, described the housing markets as 'stuck in the doldrums.'"

10:00 - Recent job reports expecting to their their toll on this month's Consumer Confidence index. The consensus view is for it to fall to 57.9, compared with 58.5 one month ago and 61.7 the month before.

"Consumers are being inundated with negative news about the economy and are faced with solutions to the debt ceiling issue that feature either tax increases, benefits reductions or both," explain economists at Citigroup.

"Little has happened in the way of good news for consumers," added forecasters at Nomura Global Economics. "Lower gas prices were quickly usurped by stock market volatility and the debt ceiling impasse. Confidence has slipped in the past few months and the early June sentiment survey showed further declines. We expect the consumer confidence measure to slide further to 55.2 in July."

10:00 - Expect New Home Sales to be roughly flat in June. The market forecast looks for an annualized pace of 320,000 home sales in June, just 1k up from last month and 6k down from April. Upside risks include strong building permit activity the last two months, offset by the recent decline in mortgage application volume.

"These sales have been in a range for the past year, slightly below the levels right after the recession," said economists at Citigroup. "However, we anticipate that sales will remain toward the high end of the range, given the uptick in housing starts and the small pickup in the housing market index, which signaled that homebuilders are seeing slightly better sales. ... Demand is still running below supply. This would be the fiftieth consecutive month of declining inventories."

Economists at BMO added: "Even the driest June in 21 years, which contributed to a near-15% surge in housing starts, is unlikely to provide a net benefit. This second consecutive monthly decline reflects the easing of job growth and consumer confidence this spring along with ongoing mortgage credit availability constraints. Furthermore, the new home segment continues to feel the pressure from the flow of foreclosed properties in the existing home segment. The only silver lining is that the new home market is relatively balanced with the months' supply not far off its historic median of 6.0 (6.2 in May)."

2:00 - Thomas Hoenig, president of the Kansas City Fed, will speak before the House Financial Services Committee's Subcommittee on Domestic Monetary Policy and Technology. His talk is called "The Impact of Monetary Policy on the Economy: a Regional Fed Perspective on Inflation, Unemployment and QE3."

Treasury Auctions:
11:30 - 4-Week Bills ($18 billion)
11:30 - 52-Week Bills ($20 billion)
1:00 - 2-Year Notes ($35 billion).

According to BMO: The Fed will purchase $2.75 to $3.50 billion of notes in the 15-Aug-2018 to 15-May-2021 range for reinvestment purposes, at 11:00.

Until next time,

James B. Driscoll