I noted yesterday that both the 2003 and 2004 comparisons suggest either a stabilization or a near term high in yields. Here’s another factor to consider: Mortgage refinancing, which has been very strong, have dropped sharply over the past several weeks. In fact, they are now down to levels not seen since early 2011. Historically, 10y yields have either peaked or stabilized when the MBA refinance index drops to these levels:
There are several reasons that suggest this relationship is NOT spurious. First, mortgage refinancing helps consumer spending by lowering mortgage payments and freeing up cashflow. This has been a powerful support to GDP growth while the economy is below ‘escape velocity.’ Even if we are at escape velocity now, (a contentious point!) a slowing in this source of cashflow will have an impact. Second, to the extent that refinancing activity is a rough proxy for housing affordability, the outlook for new home construction has slowed substantially. Homebuilding stocks are now ~20% off the highs and trending lower, so despite the strong NAHB print yesterday, the market is expecting a slowdown in new housing construction. Note that housing starts and building permits are both stable and are now at Sept 2012 levels.
Finally, the Sept tapering event seems to be pretty consensus now. The view that 10’s will hit 3% also seems pretty popular. And as we know… you don’t make much money sharing the consensus view!
- UMichigan Confidence declined to 80 vs 85.2 exp and 85.1 prev
- US Housing starts was inline at 896k vs 836k prev.
- US Unit Labor costs rose 1.4% in 2Q vs 1.2% exp
- Mon: Japan Trade Balance, RBA Minutes
- Tue: Chicago Fed National Activity index
- Wed: US Existing home Sales, China HSBC Mfg Flash PMI
- Thu: EU PMI, US Jobless Claims, CA Retail Sales, US Markit Prelim PMI
- Fri: UK 2Q GDP, Canada CPI, EU Consume Confidence, US New Home Sales