Mortgage backed securities (MBS) prices opened lower (rates higher) as Russia, India and China consider buying each other’s bonds, swapping currencies to lessen dependence on the dollar and shifting reserves out of Treasuries. After release of a wide range of economic data, MBS prices have rebounded to trade near unchanged. The three month LIBOR fell to a record low 0.61% yesterday. Speculation that the Fed will raise interest rates this year, if the economy is recovering, is fading as quickly as it surged the past two weeks. The yield spread, difference between 2yr & 10yr debt, has narrowed as investors become less concerned inflation will increase. U.S. Producer Prices rose 0.2% in May, sharply falling short of expectations, as food expenses dropped. A 2.9% increase in fuel led to the jump in wholesale prices and these costs may rise further in June. Core prices, excluding food and fuel, unexpectedly fell 0.1% in May, the first decrease since October 2006. Overall PPI fell 4.7% on a year over year basis, the biggest decrease since 1949, reflecting the drop in fuel prices late last year that has since partially reversed. The bottom line is that inflation currently is moderate. Energy prices are still a looming problem, but just not today. U.S. Housing Starts soared up 17.2% in May, showing surprising strength, to an annual rate of 532K units that followed a 454K pace the prior month. The May rebound was led by the multi-family component which posted a 61.7% gain after falling 49.4% in April. Good news is the sizeable rise in the single-family component, up 7.5% after a 3.3% rise the month before. Building permits, an indicator of future construction, rose 4% to a 518K pace from a 498K rate the previous month. However, building permits are down 47% from a year earler. Industrial Production fell 1.1% in May, reflecting declines in consumer goods and business equipment that signals the manufacturing slump remains broad based. A large source of weakness was in motor vehicles and parts which plunged 7.9%. Factory production, 80% of total production, was down 15% in the last year, the biggest 12-month drop since 1946. Manufacturing is still contracting, maintaining a moderate decline. Overall capacity utilization fell to a record low 68.3% in May from 69.0% in April. As orders have tumbled, companies have slashed production to lower inventories. The excess capacity will help control inflation as raw material costs keep rising. According to ICSC-Goldman and Redbook, weekly chain store sales show extreme weakness and that June is shaping up to be a big disappointment for non-gasoline retailers.
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