C'est Fin: Fed's Fisher Declares End to Bond Rally
We've had Federal Reserve officials say it's time to consider tapering bond purchases, but we haven't —at least not in my memory — had a Federal Reserve official declaring a rally of anything "over."
"This is the end of a 30-year rally" in bonds, Federal Reserve Bank of Dallas President Richard Fisher said last night to reporters, after a speech in Toronto. Mr. Fisher isn't a voting member of the FOMC — and granted, he's the leading voice of hawkishness within the small contingent of Fed hawks — but his views are widely quoted.
Read that comment carefully: he emphasized that this wasn't just a short-term top, this was the end of the BIG BOND RALLY. His full quote: "We've had a 30-year bull bond market...At some point secular markets change."
30-year fixed rate mortgages surged to 4.07 percent in the week ending May 31, according to the Mortgage Bankers Association, the highest since April 2012, and the first time rates have been above 4 percent since early May of last year.
What is the level for 30-year mortgages that will slow housing growth? So far, no sign of a slowdown. The Purchase Index is down 1.6 percent sequentially, not significant, and up 13.8 percent year over year. A lot of the low-hanging fruit (refinancings) have already been picked, so it should come as no surprise that refinancings are down 29 percent year over year.
1) global markets are weak: Most European benchmarks are at a one-month low. Australia fell to a 4.5 month low, while Japan hit a 2-month low.
2) Dollar/yen again under ¥100: This has become the major gauge of risk on/risk off. The yen strengthened overnight after traders were unimpressed with a speech by Shinzo Abe, and strengthened further after the ADP Employment Change for May came in below expectations.
3) ADP Employment Change, at 135,000, is well below expectations for a gain of 170,000. That comes as another blow to those thinking that the jobs market is on some kind of smooth, upward trajectory.
Meanwhile, a second blow came with the May ISM Services Report this morning, which showed a deceleration in employment index, from 52 to 50.1. That's a disappointment: according to Adrian Miller at GMP Securities, as the employment component tracks the private sector payroll numbers fairly well (we are a service based economy, after all).
According to Miller, we would need a number of 55 to get an above-200,000 private sector gains. Current estimate is for 178,000 private sector jobs created, and 167,000 for nonfarm (which includes government and private jobs growth). Clearly, we should be seeing more traction in jobs by now.
4) IPO delayed: Colony American Homes (CAHS), a REIT that specializes in buying and managing blocks of single family homes, was supposed to price 20 million shares at $11.50-$13.00 last night. It didn't happen. I am told they will try to price tonight.
5) Hovnanian is trading up after the homebuilder beat Q2 earnings and revenues expectations. The company reposted Q2 EPS of a penny, while the Street was estimating a loss of five cents. Housing-related stocks have weakened since mid-May as rates rise and the stock market loses steam. The U.S. Home Construction ETF (ITB) has fallen into correction territory, now down more than ten percent from the multi-year high it hit on May 20.
—By CNBC's Bob Pisani