The Day Ahead: Home Prices, Consumer Confidence, Tax Cuts, QEII Purchases

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The flight to safety that pushed U.S. interest rates lower yesterday has extended into today's trading session. Equities are weaker around the world, the benchmark yield curve is bull flattening, and rate sheet influential MBS prices are in the green.

Economists at BMO Capital Markets attribute the declines to fears that China is tightening its grip on growth, while European sovereign debt contagion continues to concern investors the world over.

In overnight trading the Nikkei shed 1.87% while shares in China’s fell 1.61% and those in Hong Kong dropped 0.68%. The declines sparked a sell-off in Europe as well. The FTSE is currently -0.42% and the DAX is -0.33%. S&P futures are currently -10.75 at 1175.75 and a 73 point decline has led Dow futures under the 11,000 mark to 10,963.

A risk averse attitude has helped rally domestic interest rates (and German bunds). The 2s/10s curve is 4bps flatter at 228bps wide.  The 10 year note is +17/32 at 98-25+ yielding 2.764%. The long bond is +1-16/32 at 103-10+ yielding 4.057%. The FNCL 4.0 is +8/32 at 101-24.

The dollar is near a two-month higher vs. a basket of currencies. The dollar index is currently +0.55% at 81.283.  Light crude oil is 0.51% down at $85.28 per barrel, while gold prices are flat at $1,366.00. Oil is -1.11%, Gold is +0.88% and Silver is +0.74%,

Aside from new data, the debate on extending the Bush tax cuts continues with President Obama meeting with congressional leaders in the White House. Thomson Reuters says Obama only wants tax cuts for the middle class extended, while Republicans, and some Democrats, want them all extended permanently. 

Key Events Today:

9:00 ― The S&P Case-Schiller Home Price Index, a measure of prices in 20 metropolitan areas across the country, is expected to show prices fall by a seasonally-adjusted 0.4% in September. In the August report, when prices fell 0.3%, the annual change declined from +3.2% to +1.7%; the annual change is now expected to fall to +1.1% in September. The slight fall in prices in August followed four straight increases, but it was expected given the drop in sales after the June expiration of the homebuyers' tax credit.

“House prices look to have softened in September, based on already-reported figures, and we therefore expect another step down in the Case-Shiller index,” said economists at Nomura Global Economics, who look for a 1% monthly drop in prices. “The Loan Performance house price index ― which tends to track the Case-Shiller, but is released a week or so earlier ― fell by 1.8% during the month and stands at -2.8% y-o-y. Weak home sales and ongoing foreclosures point to further weakness going forward.”

The Case-Schiller report follows the FHFA home price index, which fell 0.7% in September, leaving prices 3.4% below levels one year ago. Unlike the FHFA index, economists at BMO noted, the Case-Shiller “has been portraying positive annual changes since February. But after peaking above 4% through late spring, propped up by activity tied to expiring home purchase tax credits, the pace slipped under 2%.”

They predict that both indexes will be in negative territory before year-end.

9:45 ― The Chicago Business Barometer, a Midwest measure of the manufacturing and services industries, is expected to continue soaring at 60.0 in November. A score above 50 indicates general growth, and clearing this margin by a full ten points indicates rapid recovery. The October level was 60.6, the best score since April. That advance was led by Production jumping more than 5 points to 69.8, while New Orders climbed 4 points to 65.0 and Employment moved up to 54.6.

Economists at Nomura said the regional measure is “quite high” compared to the ISM manufacturing index, which itself is quite healthy. “The pattern is the norm historically: the Chicago index tends to exceed the level of the ISM during expansions,” they wrote. “Given the solid Philadelphia Fed survey, we forecast that the Chicago index will be about unchanged at 60.0 in November. The weakness in the Empire State index suggests some downside risks.”

10:00 ― Economists are forecasting a nice gain in the Conference Board’s measure of Consumer Confidence this month. The consensus prediction from 52 analysts surveyed by Thomson Reuters is 52.6, up from 50.2 in October. Given the recent decline in jobless claims and improvement in the economy, a gain is widely anticipated, but don’t get too optimistic ― BMO Capital Markets points out that “confidence is no higher today than it was at the turn of the year and is stuck at levels normally reserved for recession.”

Analysts at BBVA point out that Consumer Confidence Index has remained virtually flat, since May 2009, but they say fewer jobless claims should have an impact on on current and future conditions.

“In fact, the 4-week moving average of jobless claims declined to 436K in the week ending November 2, the lowest reading since August 2008,” they wrote. “We expect the Consumer Confidence Index to increase slightly in November, consistent with our expectation of slow PCE growth in 4Q10.”

3:00 ― Ben Bernanke, chairman of the Fed, is having a “Conversation on the Economy” with business leaders at Ohio State.

5:30 ― Narayana Kocherlakota, president of the Minnesota Fed, speaks on monetary and fiscal policy substitutes to a symposium on international business and economics in St. Paul.

8:00 ― Ben Bernanke, chairman of the Fed, and Sandra Pianalto, president of the Cleveland Fed, discuss the economy with global, regional and local business leaders.

OTHER EVENTS...

10:15 ― Fed QEII coupon purchase of estimated $6-8 billion in Treasuries maturing between 12/31/14 and 05/31/16