The Day Ahead: Home Prices & Consumer Confidence

The start of a new week brought with it a reversal of positive price action yesterday.

After rallying as far as 2.85% late last week, the 10yr note yield closed 5.8bps higher at 2.929%, back inside the confines of its recent 2.90 to 3.10% range. Loan pricing was mostly flat when the day began but felt some pressure as benchmarks sold off in the afternoon hours following a weak 2-year Treasury note auction. MBS went out -9/32 at 100-31. This is 11/32 below the morning price high of 101-10, which forced a few major lenders to recall and reprice for the worse.

Bonds weren't the only asset class to experience a reversal of fortune yesterday. Stocks saw corrective activity as well with a 1.01% gain to 1276.75.  This essentially erased the 1.02% decline seen on Friday. Clearly there was little conviction behind the moves seen in both markets.

The Treasury yield curve flattened overnight as investors traded short-term debt for intermediate and long-term debt. Still, not much has changed since yesterday. The two-year yield is two basis points higher at 0.41%, but the benchmark 10-year Treasury yield is one basis point firmer at 2.92% and the 30-year yield is three basis points firmer at 4.27%. Mortgages are mostly in-line with Treasuries. The Fannie Mae 4.0 MBS coupon is unchanged at 100-31.

Among equities, the S&P 500 looks to open 0.50 (0.04%) points lower at 1,2745.75 and the Dow is set to tumble 16 points at the open to 11,974. In Europe the FTSE is up 0.51% and the DAX is down 0.18%. Greek 10-year notes are 42bps tighter vs. the U.S. 10-year note at 1,276bps wide (12.76 percentage points) while German Bunds are outperforming U.S. Treasuries. The Euro is -0.15% at 1.426 and continues to hover near key technical support at 1.417.

A couple new data points hit the market today, but they take a backseat to events in Europe as the Greek parliament prepares to vote on new austerity measures Wednesday. Our main focus will be Consumer Confidence data at 10AM. This is one of the first reads on June economic data and will therefore set expectations for further June data to come.

Key Events Today:

9:00 - Home prices unexpectedly rose 0.8% in April's FHFA home price index last week. That gives a little upside risk for the S&P Case-Shiller Home Price Index, a more closely-watched index of 20 metropolitan areas. The last index, for the first quarter, was far from optimistic: prices fell 4.2% in the quarter, with the national median dropping to its lowest since mid-2002. Year-on-year, the 20-city index was down 3.6%.

According to Nomura Global Economics, prices continued to fall in April. They predict a year-on-year decline of 3.9%.

"Taking into account variations in other home price indices over the February-April period, which have already been reported by private research firms such as Zillow.com and Core Logic, the year-over-year change rate of the index likely decreased further in April," they said.

10:00 - No need to mince words here: Consumer Confidence has no reason to have increased in the past month. Since the index fell 5.2 points to 61 in May, "the consumer mood has become more pessimistic due to poor payroll numbers, a further decline in home prices, increasing non-energy prices, and an unsettling stock market." 

That's according to IHS Global Insight. But in fact: it's a minority view. The consensus anticipates a one-point gain to 62. The reasons are ... not clear. 

As forecasters at Janney put it: "Consumers got whacked hard by the ugly stick in March, as the concurrence of war in Libya, rising energy costs, and a nuclear disaster delivered bad news troika-style. After an immediate blow to confidence eased somewhat, the trickle of mixed economic data turned into a faucet of negativity, culminating in May's deeply disappointing payrolls report."

1:00 - Treasury auctions $35 billion 5-year notes