Stocks are higher and Mortgage Bonds are lower so far this morning. Yesterday, there was a vote in Crimea on whether or not to reunite with Russia. It’s interesting to see how this vote could have an impact on our Bond market. While the vote was massively one sided, with 95% voting in favor to join Russia, let’s take a closer look at the choices. The voting options were to either join Russia or become independent. Returning back to the Ukraine was not an option. The US and EU are not pleased with the way this went about and both have already issued some minor personal sanctions against Russian officials, which are symbolic at best. It’s unlikely the EU can do much because they are dependent on oil imports from Russia. But the US is contemplating selling off some of its strategic petroleum reserve (SPR), as levels of this reserve are extremely high. A move like this would likely drive down oil prices and hurt revenues to Russia from sales of oil exports. Remember that few people know that Russia is the world’s largest oil exporter. How would Russia counter if the US opened up sales of the SPR? They have already begun by moving many of its holdings of US Treasuries out of the Fed’s custody accounts and into accounts that would allow them to liquidate them more easily. Remember that Russia holds nearly $140 Billion of US Treasuries. Far less than the roughly $1.3 Trillion held by China and $1.2 Trillion held by Japan, but still enough to cause a major disruption if Russia were to play tit for tat and start dumping Treasuries to push Interest Rates Higher if the Fed started dumping oil on the market to push oil prices lower.
It’s an action packed news week. Tuesday brings the Consumer Price Index and Housing Starts, on Wednesday Janet Yellen will have her first Fed Meeting and press conference, and on Thursday Claims and Existing Home Sales will be released.
The Empire State Manufacturing Survey, which measures manufacturing in the NY region, came in at 5.61, which was lower than estimates of 6.50, but higher than last month’s weak reading of 4.48. The new orders component showed a slight increase to 3.13 vs. last month’s -0.21. Industrial Production and Capacity Utilization were both reported slightly higher than expectations. Capacity Utilization came in at 78.8%, which was stronger than the 78.6% expected. As we have discussed, Capacity Utilization is an important indicator for general economic health and inflation. When factories have excess capacity, they produce at a discount. But when they start producing near capacity or at tight levels, it can drive prices higher.
The National Association of Home Builders (NAHB) Housing Market Index for March came in at 47, which was a little better than last month’s 46, but still quite a ways below 50. This figure, which is almost in real time, tracks builders’ sentiment. Sales increased one point to 52, while future sales fell 1 point to 53. Traffic did jump 2 points to 33, but this figure is still well below 50. This part of the report is most likely to be affected by weather conditions.
Mortgage Bonds are trading in a narrow range between a strong dual layer of support at the 50 and 100-day Moving Averages and overhead resistance at the 25-day Moving Average. The 10-year Treasury Note Yield is sitting right up against resistance at the 200-day Moving Average. If Stocks end the day higher you will see mortgage rate increase some through the week.