Rates Chop Around Range as Markets Sort Through Influx of Information

September New Residential Construction data has been released....

Here is the quick recap....

08:30 19Oct10 RTRS-US SEPT HOUSING STARTS +0.3 PCT VS AUG +10.5 PCT (PREV +10.5 PCT)

08:30 19Oct10 RTRS-US SEPT HOUSING STARTS 610,000 UNIT RATE (CONSENSUS 580,000) VS AUG 608,000 UNIT RATE (PREV 598,000)

08:30 19Oct10 RTRS-US SEPT HOUSING PERMITS -5.6 PCT VS AUG +2.1 PCT (PREV +2.1 PCT)

08:30 19Oct10 RTRS-US SEPT PERMITS 539,000 UNIT RATE (CONSENSUS 580,000) VS AUG 571,000 UNIT RATE (PREV 571,000)

08:30 19Oct10 RTRS-US SEPT HOUSING COMPLETIONS +7.3 PCT TO 648,000 UNIT RATE VS AUG 604,000 UNIT RATE

Plain and Simple: Housing Starts were much better than expected but failed to match the August improvement.  Housing Permits failed to match the August uptick and were also much worse than expected.  Looking deeper into the report....The modest improvement in housing starts was led by a 19,000 unit increase in single family homes, multifamily unit starts were down 17,000 annualized units. Weakness in building permits data was also focused in the multifamily sector. Single family permits rose by 2,000 annualized units while multifamily permits fell by 34,000 annualized units.

Rates did react negatively to the release but it is important to note that weakness was present in the bond market prior to 830 data.  The recent range is still holding up.

The 2s/10s curve is 3bps steeper at 218bps wide.   The 10yr note is -0-07 at 100-23+ yielding 2.54% (+2.5bps). This is close to the center of the 2.466% to 2.604% range. Price action is random and choppy...

The December delivery FNCL 3.5 is -0-03 at 100-22. The December FNCL 4.0 is -0-01 at 103-00. Yield spreads are tighter vs. the 10yr note and 10yr swaps but inline with 5s.

There's more to consider besides housing data. There are several crosswinds in the marketplace.  Here are a few more headlines I would pay attention to....

QE FRIENDLY FED SPEAK....

08:16 19Oct10 RTRS-FED'S LOCKHART SAYS LEANING IN FAVOR OF SUPPORT FOR QE2 - CNBC
08:16 19Oct10 RTRS-FED'S LOCKHART SAYS RISKS ASSOCIATED WITH QE2 ARE ACCEPTABLE, WILL INFLUENCE INTEREST RATES "TO SOME DEGREE" - CNBC
08:17 19Oct10 RTRS-FED'S LOCKHART SAYS EXPECTS Q3 GDP TO COME IN CLOSE TO Q2 RATE, SEES VERY GRADUAL RECOVERY IN 2011 - CNBC
08:18 19Oct10 RTRS-LOCKHART SAYS NOW SOMEWHAT MORE CONCERNED WITH POSSIBILITY OF FURTHER DISINFLATION, RISK OF DEFLATION, IDEA OF STALL SPEED NOT TO BE DISMISSED
08:19 19Oct10 RTRS-LOCKHART SAYS TREASURY TAKES RESPONSIBILITY FOR EXCHANGE VALUE OF DOLLAR, FED LOOKING AT HEALTH OF DOMESTIC ECONOMY
08:22 19Oct10 RTRS-LOCKHART SAYS CLEAR THAT IF FED PURSUES FURTHER EASING, HAS TO BE LARGE ENOUGH TO MAKE A DIFFERENCE, DOESN'T MAKE SENSE TO DO SMALL PORTIONS OF QE
08:27 19Oct10 RTRS-LOCKHART SAYS $100 BILLION OF QE A MONTH WOULD BE IN RANGE OF CONSIDERATIONS, BUT BY ITSELF WOULD BE TOO LITTLE
08:40 19Oct10 RTRS-Fed Lockhart:Quantitative easing must be big--CNBC

FYI: James Lockhart is not a voter at FOMC meetings. The FRBATL doesn't get an FOMC vote until 2012

MIXED EARNINGS REACTION...

CHARLOTTE, N.C., Oct 19 (Reuters) - Bank of America Corp posted higher-than-expected quarterly operating profit as credit losses declined, the third big U.S. bank to beat Wall Street earnings estimates. But some analysts questioned whether BofA, the largest U.S. bank by assets, could continue generating profits from cutting reserves for bad loans, without much growth in its core business.  "The decreasing risk provisions is something that we've seen happening at all banks. The question for BofA is whether it can continue that trend," said Heinz-Gerd Sonnenschein, strategist at Postbank in Bonn.

BofA joined JPMorgan Chase & Co and Citigroup Inc in besting analysts' projections for the third quarter. Goldman Sachs Group Inc, the dominant U.S. investment bank, also posted better-than-expected results on Tuesday. The BofA results came one day after the bank said it would partially lift a nationwide foreclosure halt begun Oct. 9 amid a public outcry that lenders cut corners in the foreclosure process.

CURRENCIES CAUGHT OFF-GUARD....

BEIJING (Reuters) - China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects its concern about rising asset prices and stubborn inflation.

It said it was raising benchmark rates by 25 basis points, taking one-year deposit rates to 2.5 percent and one-year lending rates to 5.56 percent. The impact was felt by global markets across the board. Oil prices fell, stock markets turned negative in Europe and the dollar rose as investors were caught off guard by the tightening step.

CIVIL UNREST...

PARIS, Oct 19 (Reuters) - Striking public sector workers disrupted travel across France on Tuesday and troublemakers piggybacked on protest marches to burn cars as opponents of the government's pension reform made a last-ditch bid to stop it.

Refinery workers, airport staff, train drivers, teachers, postal workers and armoured truck drivers who supply cash machines went on strike and students set off rowdy protests in a day of protests against a plan to raise the minimum retirement age to 62 from 60. President Nicolas Sarkozy appealed to demonstrators to show restraint as protesters in the southern city of Lyon torched cars and litter bins, used cafe chairs to smash shop and bank windows, and looted shops. Police used tear gas to break up protesters in the Paris suburb of Nanterre, and cars were burnt or overturned in the suburb of Mantes-la-Jolie, French media reported.

Plain and Simple: Lockhart is a non-voter so his opinion doesn't matter as much inside the walls of the FOMC. His opinion does however influence investor perspective so we can't totally ignore it.  Skepticism surrounding organic bank earnings isn't new,  new skepticism does arise in the notion that the big banks may eventually be forced to buy back more mortgages.  China raising rates is a step in the right direction in terms of keeping our political relationship healthy, it also gives the Fed some breathing room to implement more Quantitative Easing without destroying the value of the dollar.  Civil unrest in France reminds us that we face our own  fiscal issues in the future.