A week after ECB President Mario Draghi's strongly worded rhetoric prompted a rally in the Euro and sell-off in bond markets, we come to find out this morning that Draghi was nowhere close to backing up the passionate rhetoric with tangible changes. The Euro moved right back to levels seen before last week's speech and bond markets made further headway back to their stronger levels. But MBS and Treasuries aren't quite as quick to "snap back" as the Euro has been, owing in large part to yesterday's FOMC announcement containing no new stimulative plans for domestic bond markets. That was mostly expected, but some level of hope was priced in, and has since been priced out. So the current trading levels and general tone of trading is a bit odd at the moment, in the sense that everything feels eerily logical and "where it should be." With both the ECB and FOMC doing nothing new, tomorrow's NFP can step into the spotlight a bit more. Until then 10yr yields seem like they should be well supported at 1.52, barring unexpected headlines, and possibly even well supported at 1.498. The next mini-pivot point would be around 1.47.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
Pricing as of 11:08 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts
and updates issued via email and text alert to MBS Live subscribers
ECON: Factory Orders Weaker Than Expected, But Impact Minimal
- Factory Orders -0.5 pct vs +0.5 pct consensus
- Durable orders revised to +1.3 from +1.6
- Excluding transportation -1.8 pct, most since March 2009
- Reaction to this and other domestic economic data has been fairly limited so far this morning, as expected, in favor of the ongoing reaction to Draghi's ECB press conference.
New orders for manufactured goods in June, down
three of the last four months, decreased $2.1 billion or
0.5 percent to $465.8 billion, the U.S. Census Bureau
reported today. This followed a 0.5 percent May
increase. Excluding transportation, new orders
decreased 1.8 percent.
Shipments, down two of the last three months,
decreased $5.3 billion or 1.1 percent to $469.9 billion.
This followed a 0.3 percent May increase.
Unfilled orders, up following two consecutive monthly
decreases, increased $3.4 billion or 0.3 percent to $988.1
billion. This followed a slight May decrease. The
unfilled orders-to-shipments ratio was 6.27, up from
6.24 in May.
Inventories, also up following two consecutive
monthly decreases, increased $0.4 billion or 0.1 percent
to $605.4 billion. The inventories-to-shipments ratio
was 1.29, up from 1.27 in May.
Freddie Mac: 30-Year Fixed Rate Mortgage Moves Up, Averages 3.55%
30-year fixed-rate mortgage (FRM) averaged 3.55 percent with an average 0.7 point for the week
ending August 2, 2012, up from last week when it averaged 3.49 percent. Last year at this time, the
30-year FRM averaged 4.39 percent.
15-year FRM this week averaged 2.83 percent with an average 0.6 point, up from last week when it
averaged 2.80 percent. A year ago at this time, the 15-year FRM averaged 3.54 percent.
5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.75 percent this week
with an average 0.6 point, up from last week when it averaged 2.74 percent. A year ago, the 5-year
ARM averaged 3.18 percent.
1-year Treasury-indexed ARM averaged 2.70 percent this week with an average 0.4 point, down
from last week when it averaged 2.71 percent. At this time last year, the 1-year ARM averaged 3.02
Brief Synopsis Of Draghi Press Conference
After talking up the metaphorical monetary policy "gun" last week in a London speech, ECB Pres Mario Draghi pulled it out at today's post-ECB Announcement press conference. The following image captures the essence of that gun's firing power:
ECON: Jobless Claims Slightly Lower Than Expected
In the week ending July 28 the advance figure for seasonally adjusted initial claims was 365,000, an increase of 8,000 from the previous week's revised figure of 357,000. The 4-week moving average was 365,500, a decrease of 2,750 from the previous week's revised average of 368,250.
The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending July 21, unchanged from the prior week's unrevised rate.
The advance number for seasonally adjusted insured unemployment during the week ending July 21 was 3,272,000, a decrease of 19,000 from the preceding week's revised level of 3,291,000. The 4-week moving average was 3,298,500, a decrease of 11,500 from the preceding week's revised average of 3,310,000.
Draghi Fires ECB Policy Gun. Markets Not Amused By Cartoonish "Bang!" Flag
You know the old cartoon schtick... The gun fires, but no bullets come out, and instead a very non-threatening and anticlimactic flag pops out and unfurls to reveal the text "bang!"
At this point, Draghi's speech and Q&A session have made even that comedic gun look like something serious. What we're actually hearing on the live feed right now is more of a joke than the prank gun ever was.
Essentially, the ECB did not announce that they would be buying bonds but said the MIGHT, but that the manner in which this would be accomplished has yet to be determined. Draghi was clear to pay respect to the fact that any such actions would have to fall within the ECB mandate and should be subject to "strict conditionality."
Reporters have been grilling Draghi on his remarks last week that seemed to promise swifter action, and he went so far as to note that he was "surprised by the attention given to the idea of an ESM banking license." Really Mario? Really?! He must not watch the same news we watch...
The bottom line is that the speech and the Q&A have been one colossal let-down after another for any market participants hoping for the ECB to inspire real confidence that they're equipped to materially improve the destinies (and funding costs) of the most at-risk European peripheral economies, namely Spain and Italy.
Domestic bond markets have catapulted back to previously stronger levels with 10yr yields down into the 1.47's and Fannie 3.0 MBS back over 104, up 9 ticks on the day to 104-02. Volume is the highest in two months and the trading reaction continues to unfold, but it's very much a "so far so good" for Treasuries and MBS and a very scary commentary on the Euro-zone's ability to take care of business.
MBS Open In Weaker Territory Ahead Of Next Batch Of ECB News
The overnight session was largely uneventful and fairly light in volume with 10yr Treasuries holding a narrow range between 1.51 and 1.53. This sort of "calm before the storm" was evident across FX and Fixed-Income markets as the grand unveiling of whatever it is that the ECB will do to back up their tough talk was set for 7:45am or 8:30am depending on which bullets were to be fired.
With the 7:45am benchmark rate announcement out of the way, the remaining policy tools the ECB may employ would be announced at the 8:30am press conference. Bond markets have moved somewhat swiftly into moderately weaker territory as those "remaining policy tools" would likely be less friendly for rates in the US than a simple ECB rate cut would have been.
In other words, the fact that the ECB didn't simply cut their benchmark lending rate implies a greater likelihood that something more meaningful will be announced to help reign in rising borrowing costs in Spain and Italy. The more those costs are reigned in, the more the Euro zone is perceived as tiptoeing back from the brink--and this would pull money out of the safe-haven bid for Treasuries and other assets nearest to the risk-free end of the spectrum, like MBS.
10yr yields moved up from an overnight high of 1.53 to the mid 1.55's currently. Fannie 3.0's are currently 6 ticks lower at 103-19. The ECB news at 8:30am may take a few moments to sort of trickle in and be absorbed by markets, but don't confuse the movement with the Jobless Claims report coming out at the same time. Whatever movement we see is likely to be almost exclusively driven by the ECB.
ECB's Draghi faces leadership test over euro pledge
European Central Bank President Mario Draghi was under intense pressure from investors, European leaders and even the United States to deliver on Thursday on his pledge to do whatever it takes to save the euro.
The central bank decided at its monthly policy meeting to keep interest rates on hold at 0.75 percent, but financial markets were waiting for Draghi's news conference (1230 GMT) to see what plans may be afoot to bring Italian and Spanish borrowing costs down to more affordable levels.
"This was not a surprise," Rabobank economist Elwin de Groot said of the rate decision. "It is much more important to see what other measures they might have decided."
Any sign that Draghi overplayed his hand when he made the bold pledge a week ago could see markets punish the euro zone.
His comments in London last Thursday that the ECB would do whatever it takes within its mandate to protect the currency bloc from collapse - "and believe me, it will be enough" - have already eased tensions on the debt markets.
Reuters reported on Monday the main idea under consideration by the ECB is re-activating its bond-buying programme for Spain and Italy in tandem with the euro zone's rescue funds, but that action could be at least five weeks away. (read more
ECB Leaves Rates Unchanged, Making 8:30am The Time To Watch
The ECB left their benchmark interest rate unchanged at 0.75 percent. Despite this being the the market's consensus, a benchmark rate cut was one of the bullets that the ECB may have fired today to back up Draghi's assertions that the central bank would be taking bold, sufficient action to shore up funding costs in Spain and Italy. This places the focus squarely on the 8:30am press conference as the venue at which additional bullets may or may not be fired.
Live Chat Featured Comments
Matthew Graham : "nondefense orders exclusing aircraft revised to -1.7 from -1.4"
Matt Hodges : "MG - did they break out airplane orders in the revision?"
Matthew Graham : "RTRS - U.S. JUNE FACTORY ORDERS EX-TRANSPORTATION -1.8 PCT, BIGGEST DECLINE SINCE MARCH 2009, VS MAY 0.0 PCT (PREV +0.4 PCT) "
Matthew Graham : "RTRS- U.S. JUNE FACTORY ORDERS -0.5 PCT (CONSENSUS +0.5 PCT) VS MAY +0.5 PCT (PREV +0.7 PCT) "
Matthew Graham : "I know the guy's under more pressure than I can possibly imagine, but I've lost a good bit of respect that I previously had for Draghi today. This was a total mess. The new "london whale" looks to be last week's tough-talk speech, and it's definitely still on the beach in London."
Matthew Graham : "RTRS- DRAGHI-LONDON REMARKS WERE NOT MISINTERPRETED "
Matthew Graham : "RTRS- DRAGHI - MARKETS TOOK ACTION BASED ON EXPECTATIONS FOLLOWING LONDON REMARKS, MY GUIDANCE TODAY WILL MAKE THEM MORE CONCRETE "
Matthew Graham : "lol, reporters keep asking him about london remarks. most recent guys basically said "that was pretty dumb right?" of course, no where near his exact words, but that was the feeling I got"
Matthew Graham : "Draghi's bike-maker has a tough task ahead in order to ensure that it can go from being pedaled in a forward direction so swiftly and then changed to clear backpedaling in short order."
Andrew Horowitz : "yeah, well his first notification was the repurchase demand"
John Rodgers : "They didn't ask me to repurchase the loan"
Andrew Horowitz : "how did you get around the repurchase JR?"
John Rodgers : "I've had this happen but I've never been required to repurchase the loan"
Matthew Graham : ""Mr. Draghi, I have this slight feeling that you are rowing back today. After you did the speech in london, there was a storm all over Europe and in markets." A reporter just said this... wow."
Andrew Horowitz : "Here is a new one, any of you ever have to deal with something like this: friend of mine called me yesterday, he received a repurchase request from a lender for a loan he sold them in May, apparently sometime in April the house was just a little bit on fire and the bank received the insurance check requesting their signature which triggered the repurchase. He is not disputing the repurchase, his question was does he sign off on the check or does he act as GC on the deal to make sure the work g"
Matthew Graham : "RTRS - DRAGHI, ASKED ON OTHER OPTIONS, MENTIONS, LTROS, COLLATERAL FRAMEWORK "
Matthew Graham : "RTRS - DRAGHI -"WHATEVER IT TAKES" MEANS SIZE OUGHT TO BE ADEQUATE TO MEET OBJECTIVES "
Matthew Graham : "RTRS- ECB'S DRAGHI - EVEN IF WE WERE READY TO ACT NOW, WOULD NOT GROUNDS TO DO SO "
Matthew Graham : "RTRS - DRAGHI -KNOWN THAT WEIDMANN HAS RESERVATIONS ABOUT BOND-BUY PROGRAMMES "
Matthew Graham : "RTRS - DRAGHI - REMAIN SURE, WE WILL ACT WITHIN MANDATE"
Andrew Horowitz : " credibility is taking a major blow here"
Jeff Anderson : "Markets seemed to be having some faith until that last part."
Matthew Graham : "RTRS- ECB'S DRAGHI - I HAVE SAID PRESENT DESIGN OF ESM DOES NOT ALLOW BANKING LICENCE "
Matthew Graham : "Surprised markets gave attention to groundbreaking changes to ECB policy and potential violation of EU Treaty?!"
Victor Burek : "didnt he talk that up"
Matthew Graham : "REALLY MARIO!?!??!"
Matthew Graham : "RTRS- - DRAGHI -SURPRISED BY ATTENTION GIVEN TO IDEA OF ESM BANKING LICENCE "
Matthew Graham : "WOW!"
Matthew Graham : "LOL, one reporter just asked about "some questions about these bonds that you MIGHT buy," emphasizing the "might." smack-down"
Matthew Graham : "RTRS- ECB'S DRAGHI - DECIDED NOW WAS NOT TIME "
Matthew Graham : "RTRS - ECB'S DRAGHI - DISCUSSED POSSIBLE INTEREST RATE CUTS "
Matthew Graham : "VB nailed it"
Brett Boyke : "As VB pointed out, Germany clearly wags the dog"
Matthew Graham : "there's your 1.4's... about 2 seconds after he finished."
Matthew Graham : "and the moment he finishes WITHOUT saying something concrete, we're back into 1.4's"
Matthew Graham : "his tone of voice is changing into that "i'm almost done" mode"
Matthew Graham : "oh yeah... going green is a foregone conclusion now."
Victor Burek : "bc...we go green by 8:40am"
Brett Boyke : "What's he talking about, what they are getting from Jimmy John's"
Victor Burek : "Germany told him...no bond buying"
Matthew Graham : "wow.... he's completely moved on from talking about bond buying"
Victor Burek : "going to..no details..but going to"
Andy Pada : "but he is going to create a new gun..."
Victor Burek : "he has no bullets"
Victor Burek : "so far, nothing from him"
Matthew Graham : "RTRS - ECB'S DRAGHI - OVER COMING WEEKS, WILL DESIGN MODALITIES FOR SUCH MEASURES "
Matthew Graham : "RTRS- ECB'S DRAGHI - CONCERN OF PRIVATE INVESTORS ABOUT SENIORITY WILL BE ADDRESSED "
Matthew Graham : "RTRS - ECB'S DRAGHI - GOVERNING COUNCIL MAY UNDERTAKE OUTRIGHT OPEN MARKET OPS "
Matthew Graham : "RTRS- ECB'S DRAGHI - ACTIVATION OF BAILOUT FUNDS SHOULD COME WITH STRICT CONDITIONALITY "
Matthew Graham : "RTRS - RISK PREMIA BASED ON REVERSIBILITY OF EURO ARE UNACCEPTABLE "