Bonds Sell Off on Strong ISM Data

Vital Statistics:

	Last	Change	Percent
S&P Futures	1794.3	-5.4	-0.30%
Eurostoxx Index	3033.9	-43.3	-1.41%
Oil (WTI)	93.81	0.0	-0.01%
LIBOR	0.241	0.002	1.03%
US Dollar Index (DXY)	80.62	-0.302	-0.37%
10 Year Govt Bond Yield	2.77%	-0.03%
Current Coupon Ginnie Mae TBA	105	0.1
Current Coupon Fannie Mae TBA	104.1	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.43

Weaker overseas markets mean US stocks are soggy this morning. Bonds and MBS are rallying small. Later on this morning, we will get the ISM New York and IBD / TIPP economic optimism.

Corelogic reported that home prices were up 12.5% year over year and up .2% in October. Home prices remain 17.3% below their April 2006 peak. The .2% month-over-month gain shows that real estate price growth is moderating, which was more or less to be expected. Almost half the states in the US are within 10% of their respective historical price peaks. 

Yesterday's bond sell-off was triggered by a better-than-expected ISM report, which showed that manufacturing is improving in the US and is approaching two year highs. If you look at the historical relationship between the ISM and GDP growth, the November number of 57.3 corresponds to a 4.7% increase in real GDP. The 2013 average corresponds to a 3.6% increase. Manufacturing isn't as large of a component of the US economy as it used to be, but it does show that at least one major sector in the US is picking up steam.

The other sector that really matters is housing / construction, and there we still have relatively moribund numbers, although they are steadily building back off the lows. Construction spending increased .8% month over month in October after falling .3% in September. We still have yet to get housing starts data since August, but building permits topped a 1 million pace in October. Part of the reason why this recovery has been so weak is that housing is usually the first industry to rebound after a recession and we are still at very depressed levels historically. Part of that has to do with the excesses of the bubble and low household formation numbers due to the lousy job market. The excesses of the bubble are more or less reversed and if anything, we have a deficit. The low household formation numbers have been driven by a lousy job market, not fertility rates 25 years ago, and therefore represents pent-up demand. This state of affairs cannot last (and won't).

So maybe the holidays won't be so bad after all. It looks like Cyber Monday sales were record-breaking after Black Friday sales were disappointing. Even still, it looks like the retailers are being highly promotional, which doesn't exactly speak to a healthy consumer environment. Many noted that using a deal as "bait" fell flat on its face as customers got in line to purchase one specific item, and bought it without buying anything else. Back-to-School was lousy, so it is hard to get over-optimistic about the holiday shopping season. One other thing to note - we can now look forward to the FAA regulating internet sales.

Brent Nyitray, CFA

Director of Capital Markets

iDirect Home Loans

National Asset Direct

Dellacamera Capital Management

1010 Washington Blvd, 6th Floor

Stamford, CT 06901

203-817-3614 (w)

917-841-4938 (c)