By Danny Jasper, Senior Vice President, Capital Markets

Mortgages and treasuries are rallying to start the week after this morning’s Empire manufacturing report tanked and Japan posted a large downward revision in Q2 GDP.  The New York Fed manufacturing report widely missed, coming in at -14.92 after printing at 3.86 last month, a disappointing sign that manufacturing is stalling as the effects of the rising U.S. dollar take their toll on exports.  In Japan, their Q2 GDP report showed their economy contracted at a larger clip than originally posted, from an initial print of -0.4% all the way down to -1.6%, and sparking debate on whether Japanese QE is doing anything to combat their current recession.  A flight to quality bid ensued on both reports, and after closing last week at 2.20%, the U.S. 10 year treasury yield is hovering around 2.16% as U.S. equity markets open.

Multiple Housing Reports, July CPI Data and Fed Minutes Due out This Week

Looking ahead, we have a busy week on the economic data front, with multiple key reports on housing along with July CPI data and release of the Fed minutes from their July FOMC meeting.  The housing starts report tomorrow is expected to show a rise of 0.5% in July after rising 9.8% in June, and existing home sales on Thursday is predicted to show a month-over-month decrease of 1.1%.  Wednesday will be the primary focus, as the CPI report will give investors the first glance into Q3 growth after last week’s relatively favorable retail sales report set the table for expectations that Q3 GDP will rise at a solid rate consistent with a slight rise in inflation.  Economists are predicting consumer prices increased by 0.2% month-over-month, and that year-over-year growth excluding food and energy was up 1.8%.

The Fed Minutes will also be released Wednesday, and are expected to provide clarity on Fed sentiment for a September rate hike after they added verbiage that they would only need to see “some” additional improvement in the labor market in order to justify raising rates next month.  This, combined with recent commentary last week from other FOMC participants that the Chinese Yuan devaluation (which has since stabilized after the Yuan fell 3.5% to begin the week only to rally back a bit by Friday) will not have an impact on the Fed’s decision making unless a currency war ensues (which appears unlikely at this point), has increased the likelihood of the first Fed increase happening next month to greater than 60% based on recent trading patterns.

Other pertinent data reports this week include building permits on Tuesday (expected to show a drop of 8.4% in July), the labor market report on year-over-year Real Average Weekly Earnings for employees Wednesday (which came in at +1.8% last month), initial jobless claims and the leading economic indicators index on Thursday, and another report on manufacturing Friday via the MarkIt US Manufacturing PMI report.

Currently, the DJIA is up 30 points to 17,508, and the S&P is up 1 to 2,092.  The 10yr treasury sits at 2.157%, and rates are unchanged to better by 0.125 in price vs. Friday morning depending on rate/product.

Economic calendar for 8/17/2015 – 8/21/2015 below (courtesy of the FNMA trading desk), with this morning’s data added:

Economic Calendar