For Now, Focus is on Europe

  • Treasuries are finding a bid this morning as concerns re-emerge over possible energy disruptions in Europe which could slow the global economy.


  • The EU proposed the union cut gas consumption by 15% to be better prepared for a possible full cut-off of gas by Russia heading into the winter months. With the Ukraine war showing no signs of improvement the gas supply situation is likely to be a continuing thorn in the side of the European economy, and it will only worsen as colder temperatures arrive this winter. One can easily see Putin striking a hard bargain to keep those supplies flowing if Europe finds itself running low.


  • There is other big news out of Europe this week and that is the expected rate hike by the ECB tomorrow and the decision by the Italian government on the fate of Prime Minister Mario Draghi.


  • Much like our Fed, the big debate with the ECB is whether the rate hike will be the early consensus view of 25bps or will they step-up with a 50bps hike to kick off their tightening cycle. Currently, the market has the odds at 50-50 on whether its 25bps or 50bps so that will be the drama in tomorrow’s meeting.


  • If the ECB does move 50bps it could take some pressure off the Fed as another central bank begins its tightening quest in earnest. That could help keep the Fed’s terminal rate forecast around 3.50% versus having to creep higher into the 4% range as the coordinated global tightening effort eases the global inflation threat.


  • As far as Italian Prime Minister (and former ECB head) Mario Draghi, he has made some recent comments about forming a coalition government leading some to believe he will stay on as prime minister if given a vote of confidence and contradicting some of his earlier comments about leaving. That possibility has put a bid in European sovereign debt which has also contributed to the early bid in Treasuries.


  • On this side of the Atlantic, the next piece of housing news comes this morning with June existing home sales. After the housing starts numbers disappointed yesterday, and the big drop in home builder confidence Monday, it wouldn’t surprise anyone if the home sales numbers continue the disappointment theme, given higher mortgage rates, inflation, and flagging consumer confidence.


  • Also, the latest weekly mortgage applications data continues to show weakness with purchase applications down 7.3% and refi applications down 4.3%. The purchase data is the third straight week of declining applications causing the year-over-year to be down 19%which points to continued softening in housing activity in the coming months, even as the Fed is in the early days of its hiking cycle.


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.19 3.25 3.29 3.38 3.52 3.97
0.50 3.18 3.22 3.23 3.27 3.37 3.86
1.00 3.17 3.19 3.20 3.23 3.28 3.74
2.00 3.18 3.14 3.15 3.17 NA
3.00 3.10 3.10 NA
4.00 3.05 NA
5.00 3.02 NA
10.00 NA

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Published: 07/20/22 Author: Thomas R. Fitzgerald