Bond and Mortgage Markets Weakening

We are seeing a weaker open today in the bond and mortgage markets, and this is continuing as I write my report this morning.  December retail sales were not as high as anticipated.  The report confirms that consumers were not spending as much on the holidays as had been expected on goods but consumers were buying autos and trucks. When autos and gasoline are extracted, retail sales were flat in December. Department store sales which fell 0.6% in the month and also electronic & appliance stores where sales fell 0.5%. And in a clear sign of discretionary weakness, restaurant sales fell 0.8% for the largest monthly decline in a nearly year.

December producer price index was on target. The annual pace for most of the key rates in this report, though improving, are still under 2% which does not point to much risk of a sudden jump in overall inflation. Next week the consumer price index carries a little more weight.

Not as much attention to retail as in the past because it is based mostly on brick and mortar stores when a lot of buying is now through the internet. There is not any inflation increases in the PPI data - and again markets turning to what the Fed is saying, 3 rate hikes in 2017 regardless of the minor increase in inflation. MBS prices continued to lose ground after the data.

The mid-month U. of Michigan consumer sentiment index was expected to be higher than December reading, but came in lower. November business inventories came in better than forecasted – and the largest increase since January 2013.

Yesterday I told you that it might be a good idea on floating, but with caution.  For those who watch the markets, you saw what I saw by mid-afternoon and my sentiment was corrected in last night’s commentary.  All the gains we have seen the past two days in MBSs are wiped out today.  As of 11:00AM, we are at a negative 32BPS, and the 10yr after touching 2.32% yesterday is back at 2.39% and climbing.  Because this change was tested and rejected increases its technical significance. The longer outlook for rates remains bearish with the Fed prepared to increase rates through the year and the present euphoric economic outlook - lower taxes, deregulation and fiscal spending. The WSJ and other publications are out today with articles about the dangers of an increasing dollar - the dollar has weakened this week adding to the increase of interest rates.