July Retail Sales Reflects Slowing Momentum
The week ends with a look at July retail sales and after absorbing new Treasury supply and hotter-than-expected CPI and PPI numbers Treasury yields have taken some body blows but still seem to have solid legs. The retail sales numbers are generally better than expected but off the extreme bounce in activity that characterized June. That seems to be the tone of most July reports in that activity continued moving forward but with much less momentum than June, but perhaps that is to be expected that one-time pops are just that one-time pops. For the month, overall sales rose only 1.2% versus the 2.1% forecast and well off the upwardly revised 8.4% in July. Sales ex-autos and gas were up 1.5% versus the 7.7% move in June. Sales from the Control Group—a direct GDP feed—were up 1.4% versus 0.8% expected and 6.0% in June. The question now is is the new normal going to be the July numbers, or does the consumer sag a little more given the fading fiscal stimulus? It’s likely August could be lower than July so that’s why we view the backup in rates to be a buying opportunity rather than the beginning of a material move higher in yields.
On Wednesday night, both Fannie Mae and Freddie Mac announced a 50bp increase in Loan Level Price Adjustments in the form of an adverse market refinance fee/Market Condition Credit Fee. The fee is meant to offset credit losses expected by the mortgage giants in the current economic environment. This 50bp fee will apply to all refinance applications (cash out or no cash out). It will not apply to purchase loan applications. The impact of this fee will make refi’s a little more expensive. The fee is paid by the borrower but such fees are typically rolled into the interest rate and effectively increasing the rate by 10-15bps.
On the margins it will slow some refinance activity with the modest impact to the interest rate. However, there still exists a pretty wide spread between the primary and secondary market yields such that retail rates could absorb that fee and still generate healthy spreads for originators. Most likely, however, they will try to pass 100% of the cost to the borrowers and see if it slows activity too much. We tend to think that there will be some modest slowing in refinances, and hence one source of prepayments, but it’s likely to be mostly around those cuspy coupons that sit right on the fence of being eligible for refi.
Bloomberg Consumer Comfort Reading Rolling Over in August?
One high frequency report we’ve been highlighting is the Bloomberg Consumer Comfort reading that comes out weekly. While the more well-known Conference Board’s Consumer Confidence and University of Michigan Consumer Sentiment readings get more attention, they are monthly reports so any changes in sentiment brought on by rising virus cases and fading stimulus will be slow to reflect. Yesterday’s Bloomberg report showed consumer confidence is actually starting to roll over after rebounding in early to mid-July. So, as fiscal stimulus looks to be fading, so too consumer sentiment seems to have plateaued, if not taken a dip lower. That’s one reason we think August consumer activity may struggle to match the results of July.
Copper/Gold Ratio Declines While Treasury Yields Increase
We’ve been showing on occasion the relationship between the Copper/Gold Ratio and the 10yr Treasury yield. Historically, the two have tracked pretty closely as the Copper/Gold ratio follows economic prospects well. As the economy expands copper prices rise and gold typically falls as the fear factor fades. So a rising copper/gold ratio implies expanding economies and that typically includes rising interest rates. Recently, however, the copper/gold ratio was rising as global economies were awakening after the worst of the pandemic eased but Treasury yields resisted. This week, however, it has been another story with yields finally rising but the copper/gold ratio has been falling. So, what to make of the yield increase? Perhaps it’s less economic-inspired and more driven by supply and other one-off factors?
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.09%||UNCH||1 Mo LIBOR||0.16%||-0.02%||FF Target Rate||0.00%-0.25%||3 Year||0.252%|
|6 Month||0.11%||-0.01%||2 Mo LIBOR||0.26%||UNCH||Prime Rate||3.25%||5 Year||0.349%|
|2 Year||0.16%||+0.03%||6 Mo LIBOR||0.34%||+0.01%||IOER||0.10%||10 Year||0.683%|
|10 Year||0.70%||+0.14%||12 Mo LIBOR||0.46%||-0.03%||SOFR||0.10%|